financing for development in asia and the pacific action...analyses and content provided in the...

Financing forDevelopment in

Asia and the PacificHighlights in the Context of the

Addis Ababa Action Agenda

The shaded areas of the map indicate ESCAP members and associate members.*

The Economic and Social Commission for Asia and the Pacific (ESCAP) serves as the United Nations’ regional hub promoting cooperation among countries to achieve inclusive and sustainable development. The largest regional intergovernmental platform with 53 Member States and 9 associate members, ESCAP has emerged as a strong regional think-tank offering countries sound analytical products that shed insight into the evolving economic, social and environmental dynamics of the region. The Commission’s strategic focus is to deliver on the 2030 Agenda for Sustainable Development, which is reinforced and deepened by promoting regional cooperation and integration to advance responses to shared vulnerabilities, connectivity, financial cooperation and market integration. ESCAP’s research and analysis coupled with its policy advisory services, capacity building and technical assistance to governments’ aims to support countries’ sustainable and inclusive development ambitions.

*The designations employed and the presentation of material on this map do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.

FINANCING FOR DEVELOPMENT IN ASIA AND THE PACIFICHighlights in the Context of the Addis Ababa Action Agenda2019 Edition

FINANCING FOR DEVELOPMENT IN ASIA AND THE PACIFIC

Highlights in the Context of the Addis Ababa Action Agenda 2019 Edition

Copyright © United Nations 2019

All rights reserved

Printed in Bangkok

ST/ESCAP/2854

Cover credit: iStock photo ID: 913000664 (Denys Yelmanov)

This publication may be reproduced in whole or in part for educational or non-profit purposes without special permission from the copyright holder, provided that the source is acknowledged. The ESCAP Publications Office would appreciate receiving a copy of any publication that uses this publication as a source.

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This publication has been issued without formal editing.

Foreword

Two recent pieces of analytical work prepared by ESCAP in 2019 provide important insights in evaluating the progress of Asia and the Pacific to achieve the Sustainable Development Goals (SDG) by 2030. The first is the Asia and the Pacific SDG Progress Report 2018 which includes a statistical assessment of the likelihood of reaching the SDGs based on extrapolation of current trends and existing data, and the second is an estimation of investment requirements needed to achieve the Goals, published as part of the 2019 edition of the Economic and Social Survey of Asia and the Pacific.

The results presented in the Asia and the Pacific SDG Progress Report 2018 are sobering: It shows that at the current rate of progress, none of the SDGs will be met in the region by 2030. The report finds that the biggest progress since 2000 has taken place on SDGs 4 (quality education) and 7 (affordable and clean energy); however, despite great efforts, progress has been insufficient on SDGs 1 (no poverty), 3 (good health and well-being), 5 (gender equality), and 17 (partnership for the goals). Worryingly, the report also finds that the region has made negative progress on three goals – clean water and sanitation (SDG6), sustainable consumption and production (SDG 12), and climate action (SDG 13). These results suggest the need for a change in policy direction, supported by investments in the SDGs.

The 2019 Economic and Social Survey of Asia and the Pacific finds the required investment to meet the SDGs are daunting, but not impossible to reach. It estimates that the developing countries of Asia and the Pacific would need, on average, an annual additional investment of around $1.5 trillion, equivalent to 5 per cent of their combined gross domestic product (GDP). Of this amount, the largest share, $698 billion per year, will be needed to address social goals such as eliminating extreme poverty and malnutrition, and providing basic healthcare and quality education for all. The second largest share, $590 billion per year, will be needed to reach environmental goals such as increasing energy efficiency and the use of renewables, as well as protecting natural ecosystems and biodiversity.

The Survey concludes that the additional investment is within reach for many countries in the region, while it also acknowledges that the funding gap is too high for the region’s least developed countries, 16 per cent of the GDP. It also finds that the funding gap for countries in South and South-West Asia is 10 per cent of the GDP and that the Pacific island developing States face additional challenges given their high vulnerability to climate change. This suggest that in addition to national efforts, the region needs to strengthen its regional cooperation to facilitate the achievement of the SDGs in the weakest countries of Asia and the Pacific.

iFinancing For development in asia and the paciFichighlights in the context of the addis ababa action agenda - 2019 edition

Given the region’s insufficient progress towards the SDGs and the significant additional investments that will be required, the mobilization of additional financial resources is essential. To understand where the region stands in that regard, this report examines the region’s progress in the implementation of the Addis Ababa Action Agenda agreed at the Third International Conference on Financial for Development. The report highlights key developments in each of the agenda’s action areas discussing recent national policies and regional cooperation initiatives to mobilize domestic public resources, foster private business and finance, deepen international development cooperation, promote international trade, maintain macroeconomic and financial stability and make progress in science, technology and innovation.

Among other findings, the report shows that enhancing domestic revenues through tax reform and reducing illicit financial flows will provide much needed fiscal space for governments to fund their development programs. The report also highlights the importance of the private sectors to increase the available financing for infrastructure projects, climate financing, and micro, small, and medium enterprises. Lastly, it underlines the need for international development cooperation to scaling up their efforts in achieving agreed targets amid the current uncertainty about the global economic situation and the increase in trade protectionist policies.

I am confident that this report will provide a useful complement to ESCAP’s recent analytical work of assessing the progress and estimating the investment requirements for the region to achieve the SDGs by looking in detail at various financing aspects, which are their key means of implementation.

Hongjoo HahmDeputy Executive SecretaryUnited Nations Economic and Social Commission for Asia and the Pacific

ii Financing For development in asia and the paciFichighlights in the context of the addis ababa action agenda - 2019 edition

Acknowledgements

The 2019 edition of this report was prepared under the overall direction of Hong Joo Hahm, Deputy Executive Secretary of ESCAP, and coordinated by Hamza Ali Malik, Director, Macroeconomic Policy and Financing for Development Division. The core research team, led by Tientip Subhanij, Chief of Financing for Development, and Alberto Isgut, Economic Affairs Officer, included Masato Abe, Shuvojit Banerjee, Jyoti Bisbey, Zheng Jian, Nyingtob Norbu, Jose Antonio Pedrosa Garcia, and Roman Daniel Thieler of the Macroeconomic Policy and Financing for Development Division; Laura Altinger, of the Information and Communications Technology and Disaster Risk Reduction Division; and Mia Mikic, Director, Witada Anukoonwattaka, Berna Dogan-Van Gisbergen, Yann Duval, Marta Perez Cuso, and Marcel Proksch of the Trade, Investment and Innovation Division. Daniel Lin, Zenathan Adnin Hasannudin, Daniel Jeong-Dae Lee, and Kiatkanid Pongpanich provided valuable research assistance and inputs, while Goragod Chamgamon designed the cover page. The team also wishes to acknowledge the following interns for their contributions to the preparation of the report: Lena Kaiser, Richard Sean Lobo, Andre Ringdorfer, and Ching Yuan Chu.

iiiFINANCING FOR DEVELOPMENT IN ASIA AND THE PACIFICHighlights in the Context of the Addis Ababa Action Agenda - 2019 Edition

Explanatory Notes

Analyses and content provided in the Financing for Development in Asia and the Pacific: Highlights in the context of the Addis Ababa Action Agenda 2019 edition are based on data and information available up to 1 March 2019.

Groupings of countries and territories/areas referred to in the present issue of the report are defined as follows:

• ESCAP region: Afghanistan; American Samoa; Armenia; Australia; Azerbaijan; Bangladesh; Bhutan; Brunei Darussalam; Cambodia; China; Cook Islands; Democratic People’s Republic of Korea; Fiji; French Polynesia; Georgia; Guam; Hong Kong, China; India; Indonesia; Iran (Islamic Republic of); Japan; Kazakhstan; Kiribati; Kyrgyzstan; Lao People’s Democratic Republic; Macao, China; Malaysia; Maldives; Marshall Islands; Micronesia (Federal States of); Mongolia; Myanmar; Nauru; Nepal; New Caledonia; New Zealand; Niue; Northern Mariana Islands; Pakistan; Palau; Papua New Guinea; Philippines; Republic of Korea; Russian Federation; Samoa; Singapore; Solomon Islands; Sri Lanka; Tajikistan; Thailand; Timor-Leste; Tonga; Turkey; Turkmenistan; Tuvalu; Uzbekistan; Vanuatu; and Viet Nam.

• Least developed countries: Afghanistan; Bangladesh; Bhutan; Cambodia; Kiribati; Lao People’s Democratic Republic; Myanmar; Nepal; Solomon Islands; Timor-Leste; Tuvalu and Vanuatu. Samoa was part of the least developed countries prior to its graduation in 2014.

• Landlocked developing countries: Afghanistan; Armenia; Azerbaijan; Bhutan; Kazakhstan; Kyrgyzstan; Lao People’s Democratic Republic; Mongolia; Nepal; Tajikistan; Turkmenistan and Uzbekistan.

• Small island developing states: Cook Islands; Fiji; Kiribati; Maldives; Marshall Islands; Micronesia (Federated States of); Nauru; Niue; Palau; Papua New Guinea; Samoa; Solomon Islands; Timor-Leste; Tonga; Tuvalu and Vanuatu.

• East and North-East Asia: China; Democratic People’s Republic of Korea; Hong Kong, China; Japan; Macao, China; Mongolia and Republic of Korea.

• North and central Asia: Armenia; Azerbaijan; Georgia; Kazakhstan; Kyrgyzstan; Russian Federation; Tajikistan; Turkmenistan and Uzbekistan.

• Pacific:AmericanSamoa;Australia;CookIslands;Fiji;FrenchPolynesia;Guam;Kiribati;MarshallIslands;Micronesia (Federated States of); Nauru; New Caledonia; New Zealand; Niue; Northern Mariana Islands; Palau; Papua New Guinea; Samoa; Solomon Islands; Tonga; Tuvalu and Vanuatu.

• South and South-West Asia: Afghanistan; Bangladesh; Bhutan; India; Iran (Islamic republic of); Maldives, Nepal; Pakistan; Sri Lanka and Turkey.

• South-East Asia: Brunei Darussalam; Cambodia; Indonesia; Lao People’s Democratic Republic; Malaysia; Myanmar; Philippines; Singapore; Thailand; Timor-Leste and Viet Nam.

iv Financing For development in asia and the paciFichighlights in the context of the addis ababa action agenda - 2019 edition

AcronymsADB Asian Development Bank APEC Asia-Pacific Economic Cooperation API Application Programming InterfaceASEAN Association of Southeast Asian Nations BEPS Base erosion and profit-shifting BoT Bank of Thailand CPTPPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership CTRP Comprehensive Tax Reform ProgramESCAP United Nations Economic and Social Commission for Asia and the Pacific FDI Foreign direct investment FinTech Financial technology FTA Free trade agreements GDF Green Climate Fund GDP Gross domestic product GEF Global Environmental Facility GNI Gross national income HKMA Hong Kong Monetary AuthorityIATF Intergovernmental participation and an inter-agency task forceICT Information and communications technologies IMF International Monetary Fund LCY Local currency LDCs Least developed countries LTV Loan-to-value MDB Multilateral Development Banks MSMEs Micro, small, and medium-sized enterprisesNPL Non-performing loans NTM Non-tariff measuresODA Official Development Assistance OECD Organization for Economic Co-operation and Development PIT Personal income tax PPP Public-private partnerships R&D Research and developmentRCEP Regional Comprehensive Economic Partnership SDG Sustainable development goals SME Small and Medium Enterprises TFF Thailand Future Fund TOSSD Total official support for sustainable development TRAIN Tax Reform for Acceleration and InclusionUNDP United Nations Development Programme VAT Value-added tax WTO World Trade Organization

vFinancing For development in asia and the paciFichighlights in the context of the addis ababa action agenda - 2019 edition

Table Of Contents

Foreword ...............................................................................................................i

Acknowledgements .............................................................................................iii

Explanatory Notes ...............................................................................................iv

Acronyms .............................................................................................................v

Introduction ..........................................................................................................1

A. Domestic Public Resources ..............................................................................3A.1 Improving National Tax Systems ......................................................................................... 3A.2 Reducing Illicit Financial Flows ......................................................................................... 10

B. Domestic and International Private Business and Finance ..............................13B.1 Infrastructure Finance and Capital Market Development ................................................ 14B.2 Foreign Direct Investment .................................................................................................. 20B.3 Micro, Small and Medium-Sized Enterprise Financing ..................................................... 22

C. International Development Cooperation .........................................................27C.1 Official Development Assistance and South-South Cooperation .................................... 27C.2 Climate Finance .................................................................................................................. 31

D. International Trade as an Engine for Development ..........................................33D.1 Multilateral and Regional Trade Policies ........................................................................... 33D.2 Enabling Least Developed Countries Participation in Trade ............................................ 36

E. Debt and Debt Sustainability ..........................................................................38

F. Addressing Systemic Issues ..........................................................................42

G. Science, Technology, Innovation and Capacity-Building ..................................44

Conclusion .........................................................................................................48

References .........................................................................................................49

Annex .................................................................................................................54

vi Financing For development in asia and the paciFichighlights in the context of the addis ababa action agenda - 2019 edition

IntroductionThe Addis Ababa Action Agenda of the Third International Conference on Financing for Development (henceforth “the Agenda”) has been recognized as critical for the realization of the Sustainable Development Goals (SDG) and targets (United Nations, 2015b, para. 40). The Agenda provides a global framework for financing sustainable development and consists of several hundred commitments and policy actions that member States of the United Nations pledged to undertake individually and collectively (United Nations, 2015a).

The Agenda established a follow-up process which includes an annual Economic and Social Council forum on financing for development with universal, intergovernmental participation and an inter-agency task force (IATF) composed of major institutional stakeholders and the United Nations system (United Nations, 2015a, para. 132 and 133). The purpose of the IATF, of which the Economic and Social Commission for Asia and the Pacific (ESCAP) is a member, is to report annually on the progress in implementing the Agenda.1

This year’s IATF report highlights that investments that are critical to achieving the SDG remain underfunded. The report encourages governments and the private sector to incorporate long term sustainability horizons as a central element of their investment decision. The report also advocates the need to strike a balance between managing emerging risks and enabling innovation to generate significant progress towards implementing the Addis Ababa Action Agenda.

The Addis Ababa Action Agenda established that a High-level Dialogue on Financing for Development will be held back-to-back with the High-level Political Forum every four years, when the latter is convened under the auspices of the

General Assembly. The first meeting of the High-level Dialogue on Financing for Development will take place on 26 September 2019.

The importance of finance for the achievement of the SDG was further highlighted by the Secretary General of the United Nations at the High-level meeting on Financing for Development that took place during the General Assembly in September 2018. On that occasion, the Secretary General released a four-year strategy for financing the 2030 Agenda for Sustainable Development that lays out the United Nations’ role and key actions it will take to help accelerate and deepen the transformation of financial systems to provide development finance efficiently (United Nations, 2018). The strategy has three objectives:

1. Aligning global economic policies and financial systems with the 2030 Agenda.

2. Enhancing sustainable financing strategies and investments at the regional and country levels.

3. Exploiting the potential of financial innovations, new technologies and digitalization to provide equitable access to finance.

On the first objective, the strategy emphasizes the role of the United Nations in setting global norms and frameworks, and it notices that at the moment there are no globally agreed definitions of concepts such as impact investment or sustainable investing despite a growing private sector interest in them. This is also the case in the specific area of green bonds, where there are no globally agreed standards regarding which investments can be considered “green”. Thus, making progress in setting global norms for sustainable financing can help align national financial sector policies and regulations in order to encourage an expansion of private financing of sustainable activities.

1 ForthelistofmembersoftheInter-agencytaskforceonfinancingfordevelopment,seeInter-AgencyTaskForceonFinancingforDevelopment(2018).

1Financing For development in asia and the paciFichighlights in the context of the addis ababa action agenda - 2019 edition

On the second objective, the strategy commits the United Nations Development System to support the development of sustainable financing strategies at the country and regional levels through its country offices and regional teams. For this objective, the strategy focuses in particular on the need for developing countries to strengthen and increase the effectiveness of their tax systems to generate sufficient domestic public resources for funding SDG in areas such as health and education, where public funding is needed. For this purpose, the strategy commits to continue providing capacity-building support in cooperation with other international institutions in areas such as illicit financial flows, tax evasion, tax transparency and base erosion and profit shifting.

On the third objective, the strategy emphasizes the importance of access to finance for sustainable and equitable development and the potential of financial innovations and digitalization to enhance financial inclusion, but it also points out to the large gaps in financial access that remain in the poorest countries, particularly for women and for micro, small and medium-sized enterprises. Acknowledging that innovative financing mechanisms pose challenges to financial regulation and consumer protection, the strategy commits to bring together policy makers, financial regulators, and digital finance and fintech innovators, to exchange information and experience on innovative financial instruments and good practices.

Supporting United Nations work at the global level from the perspective of Asia and the Pacific, it is worthwhile noting that ESCAP has played an active role in building consensus and articulating regional views on financing for development through four high-level policy dialogues. The first two were organized in partnership with the Ministry of Finance of Indonesia in 2014 and 2015. The third policy dialogue was held in partnership with the Ministry of Foreign Affairs of the Republic of Korea in 2016, and the fourth one was convened by the Government of Sri Lanka in 2017 and took place in Bangkok.

Four important areas of focus in these policy dialogues were tax and public finance, infrastructure financing and capital market development, climate finance, and financing of micro, small and medium-sized enterprises. In addition to the policy dialogues, ESCAP has been supporting its member States through analytical research and capacity building activities. See annex for details.

The purpose of this report is to take stock of salient aspects of the implementation of the Addis Ababa Action Agenda in Asia and the Pacific by highlighting key developments and policy actions by ESCAP member States in the seven areas of the Agenda. In doing so, the report also provides information on the progress of the region towards parts of the Secretary General strategy for financing the 2030 Agenda for Sustainable Development, particularly its second and third objectives.

Considering the large membership of ESCAP and the many policy areas included in the Agenda, this report is necessarily selective in its coverage. It, nevertheless attempts to ensure a geographically balanced coverage of the region, as well as the inclusion of the most significant policy actions undertaken. This edition of the report provides an update of the first edition published in 2018, and it will provide inputs for the deliberations of the second session of ESCAP’s Committee on Macroeconomic Policy, Poverty Reduction and Financing for Development, in November 2019.

2 Financing For development in asia and the paciFichighlights in the context of the addis ababa action agenda - 2019 edition

A.Domestic Public ResourcesDomestic public resources are critical to finance sustainable development in Asia and the Pacific. The Agenda, therefore, underscores the need to implement public policies for the mobilization and effective use of domestic resources to achieve the SDG. To this end, the Agenda commits to enhancing revenue administration through modernized, progressive tax systems, improved tax policy and more efficient tax collection, and to improve the fairness, transparency, efficiency and effectiveness of national tax systems, including the broadening of the tax base (United Nations, 2015a, para. 22). The Agenda also commits to redouble efforts to substantially reduce illicit financial flows by 2030, by combating tax evasion and corruption through strengthened national regulation and increased international cooperation (para. 23). This section discusses key issues and reviews recent policy actions in Asia and the Pacific on these two areas.

A.1 Improving National Tax SystemsLow levels of tax revenues remain a major bottleneck for developing Asia-Pacific countries to effectively finance sustainable development. Developing countries of the region have underperformed in tax revenue mobilization not only compared to developed countries but also compared to developing country peers from other regions.2 The greatest challenges are with the least developed members of the region. Tax revenues as a percentage of the gross domestic product (GDP) in Afghanistan, Bangladesh and Myanmar, for instance, remain in single digit, and more than a third of Asia-Pacific developing countries collect taxes that are less than 15 per cent of GDP (Figure 1) – a revenue level broadly deemed as minimum to fund sustained progress towards the SDGs.

On the bright side, tax revenue mobilization in the region has improved somewhat in recent years, with a number of countries making notable progress. In 2017, thirty-seven Asia-Pacific developing countries, for which tax revenue data is available, collected on average 16.8 per cent of GDP from taxes, compared to 16.1 per cent five years ago in 2012. The progress has been broad-based, but uneven (Figure 2). Roughly a third of the developing countries in our sample achieved more than 10 per cent increase in tax revenues (measured as share of GDP) between 2012 and 2017. However, during this same period, one in five of the countries suffered setbacks in tax revenue mobilization efforts of more than 10 per cent.

The South and Southwest Asia sub-region has seen the greatest improvement, with their average tax-to-GDP ratio increasing by 1.8 percentage points, from 12.7 per cent of GDP in 2012 to 14.5 per cent of GDP in 2017. The Pacific sub-region and the Southeast Asia sub-region also made progress, respectively increasing their tax-to-GDP ratio by 1.3 percentage points and 0.2 percentage point.

In North and Central Asia, the average tax-to-GDP ratio decreased marginally by 0.3 percentage points due to revenue declines in Uzbekistan (4 percentage points) Russian Federation (3.1 percentage points), and Kazakhstan (2.4 percentage points). In contrast, most other members of the sub-region, including Armenia, Azerbaijan, Tajikistan and Kyrgyzstan, managed to strengthen their tax revenues as a share of GDP during this period, while tax revenues in Georgia remained largely the same. In North and Northeast Asia, the only two developing countries, China and Mongolia, suffered drops in their tax-to-GDP ratio, partly due to an economic slowdown and partly driven by tax reductions aimed at supporting economic growth.

2 UnitedNationsEconomicandSocialCommissionforAsiaandthePacific(2018),


Figure 1. Tax Revenue of the Asia-Pacific Countries, 2017 or Latest Year

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Source: ESCAP based on IMF, Government Finance Statistics Database, Available from www.imf.org/en/Data. Accessed 07 February 2019. Notes: 1. Tax revenue data refers to general government, with the exception of countries marked with ‘*’, for which it refers to the central government budget. 2. Least developed countries are highlighted in green.

Figure 2. Changes in Tax Revenue as per cent of GDP, 2017 vs 2012

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4 FINANCING FOR DEVELOPMENT IN ASIA AND THE PACIFICHighlights in the Context of the Addis Ababa Action Agenda - 2019 Edition

A number of countries made remarkable progress in tax revenue mobilization in this five-year period. Maldives increased its tax revenue level by more than 70 per cent from 13.7 per cent of GDP in 2012 to 23.5 per cent of GDP in 2017. Nepal, Cambodia, Myanmar, Samoa, Tonga and Sri Lanka also brought up their tax revenue levels by a significantly margin. Most progress was achieved through comprehensive tax reforms that prioritized tax base broadening, improvement in tax administration and tax education.

Even in countries where changes in revenue mobilization were less dramatic, comprehensive tax reforms have been a major policy response to economic challenges in recent years. An effective, accountable and fair tax system is key for the developing countries of the region to shore up their fiscal positions, sustain economic growth and effectively support the 2030 Agenda. Such improvements can contribute to the attainment of sustainable development by creating incentives for firms and consumers to undertake behavioral changes leading to desirable environmental and social outcomes, such as reducing air pollution or excessive inequalities.

In addition to efforts at the central government level, strengthening public revenue mobilization for sustainable development would also require targeted reforms at the sub-national level and better coordination between central and sub-national governments.

The Asia-Pacific region is under significant pressure to finance its expanding cities. Between 2000 and 2015, 940 million people moved into Asian cities, and an additional 160 million people of the region are expected to become new urban residents by 2025. The financing needs to provide urban infrastructure, public services, jobs and livelihood at such scale within such short periods is well beyond the fiscal capacity of most municipal governments in the region.

Even for the largest and most economically dynamic cities in Asia and the Pacific, the situation could be turning for the worse rather than better. In Mumbai for instance, revenues of

the Municipal Corporation of Greater Mumbai (MCGM) steadily decreased from 8.23 per cent of local GDP to 6.95 per cent of local GDP between 2013 and 2017.3 This led to a stagnation in per capita public spending, a substantial drop in the share of capital expenditure in the overall expenditure mix in recent years, and significant and persistent deficits in public service provision and the proliferation of slums in the city.4

However, there is no simple fix to financially enable municipal governments and strengthen their fiscal positions in fast urbanizing developing countries. Necessary reforms, such as the devolution of expenditure responsibilities and revenue mobilization powers or adjustments in municipal governance structure to capture economies of scale, are often beyond the jurisdiction of municipal governments themselves or a single central government ministry.

At the same time, the availability and effectiveness of municipal revenue options are highly dependent on legal and institutional constraints, local social-economic contexts, legacies of past policies as well as capacities and incentives. This calls for a more holistic approach of coordinated reforms at both the central and the local government levels to succeed in financing for sustainable urban development and healthy urbanization in Asia and the Pacific.

Close collaboration beyond national borders is also required to address new tax challenges in an increasingly interlinked world. Effective taxation of cross-border economic activities in the age of globalization poses a collective challenge. Bilateral tax treaties determine the allocation of taxing rights among countries to avoid double taxation. As value chains include multiple jurisdictions, bilateral tax treaties need to be harmonized to avoid loopholes and mismatches.

Such loopholes and mismatches provide opportunities for tax evasion and avoidance at a large scale. Asia and the Pacific in particular, as a leading force in global trade and value chains, is exposed to serious risks of tax base

3 District Development Product (DDP).4 If inflation is taken into account, real per capita public spending actually decreased in MCGM between 2013 and 2017.


erosion linked with aggressive tax planning, illicit financial flows, and other legal or illegal ways to hide taxable profits or assets or transfer them to low tax jurisdictions. The Organisation of Economic Cooperation and Development (OECD) conservatively estimates that $250 billion are lost annually in global tax revenue due to base erosion and profit shifting (BEPS).5

The emergence of the digital economy further adds to the challenge. Digitalization has generated a variety of new business models such as eCommerce, social media platforms and financial technology (FinTech), which have been gaining momentum. It is estimated that by 2025 the digital economy among members of the Association of Southeast Asian Nations (ASEAN) alone would triple in size (Google-Temasek, 2018).

Such new business models and the fact that a company can now be economically active in one jurisdiction without maintaining a physical presence there, by fully relying on online services challenge the fundamental principles of taxation that commercial activity should be taxed in the location it has taken place in. With the digitalization of the economy, it is now increasingly difficult to determine which economic activity takes place in which country and which tax jurisdiction has the right to tax it. Unless tax laws account for the new business models, a growing share of the economy would remain untaxed or under taxed.

The tax treatment of intangibles, such as intellectual property rights or user data gathered by social media platforms or search engines, is at the heart of taxation related to the digitalized economy. New norms and practices would have to be established to provide clarity about what kind of economic presence in a jurisdiction triggers income tax obligation in that jurisdiction.

International and regional tax cooperation would be vital in the process of reforming the international taxation landscape to effectively check harmful practices of aggressive tax planning and base erosion, and to address the emerging challenges of taxing the digital economy. Inclusive

dialogues and broad-based coordination would be particularly useful to proactively engage developing countries in the decision-making process and fully take into account their unique demands and local constraints that are different from those in developed countries.

Policy Actions during 2017-20182017-2018 was an exciting year for tax reforms in the Asia-Pacific region. The first package of Philippines’ Comprehensive Tax Reform Program (CTRP) was enacted as law in late 2017 and rolled out in 2018. At the same time, Nepal is going through one of the most significant fiscal changes in the region - the transition towards a federal system. Several least developed countries and small island states, such as Cambodia, Myanmar and Maldives, have embarked on commendable fiscal transformations in recent years, which led tax revenues to double within a short period. Their success has been anchored on the rationalization in tax composition and rate structure, and more importantly on systematic reforms to strengthen tax administration, sometimes starting from scratch.

Important tax and fiscal reforms are also being implemented in bigger developing countries of the region. China, for example, passed the new personal income tax (PIT) legislation in 2018, raising PIT exemption threshold by more than 40 per cent and adjusting the other PIT brackets to reduce tax burdens on the poor and middle class. In 2018, China also wrapped up its debt-swap program, which converted RMB 10.9 trillion (equivalent to 13 per cent of GDP) worth of informal sub-national borrowing into formal government bonds between 2015 and 2017.6 The merger of national and sub-national tax authorities into a single nation-wide tax authority also began in 2018. This marks the greatest reform in tax administration in China since the last wave of comprehensive tax and fiscal reforms back in mid-1990s. This reform is a crucial component of China’s strategic revision of the central-local fiscal relation.

5 OrganizationforEconomicCooperationandDevelopment.(2018).6 ChinaDaily.http://www.chinadaily.com.cn/a/201801/26/WS5a6a605ba3106e7dcc136aba.html.


Comprehensive Tax Reforms in CambodiaCambodia achieved remarkable progress in establishing a modern tax system and strengthening tax revenue mobilization in recent years. Since 2012, tax revenue collection has consistently exceeded government revenue targets and outpaced GDP growth. Total tax revenue more than tripled during this period, from $590 million in 2011 to $1.9 billion in 2018.7 Its tax-to-GDP ratio, which was close to 10 per cent in 2012, reached 15.8 per cent in 2017. This revenue level is close to the regional average of 16.8 per cent in the same year and ranks only after Viet Nam and Thailand in the ASEAN sub-region.

Comprehensive tax reforms implemented by the government, with support from international organizations and development partners, have been the main driver behind this success. Cambodia’s Revenue Mobilization Strategy (RMS) for 2014-18 set five main reform objectives with focus on strengthening tax administration, promoting a tax-paying culture and tax compliance, improving management and services for taxpayers, contributing to improving the business environment, and promoting equity and fairness.8 The Strategy prioritized several policy thrusts respectively targeting revenue policy and its institutional framework, revenue administration, and monitoring and evaluation.

Eighty-six concrete reform measures were included in the Strategy, including reforms to improve human resource policies and internal management of the General Department of Taxation, to move towards full automation of tax administration processes and a centralized tax payer database, to upgrade taxpayer services (including through e-payment options), and to strengthen internal audit, investigation and dispute resolution. As of 2018, seventy one of these eighty-six measures had been completed, with the remaining 15 measures in active progress.

The Transition to a Federal System and Taxation Challanges in NepalNepal embarked on an ambitious constitutional transition towards a federal system in 2015, which introduced a three-tier government structure comprising federal, provincial and local governments. Such a transition and the subsequent fiscal reforms significantly changed the fiscal landscape of revenue mobilization, revenue assignment and the devolution of expenditure responsibilities across the different tiers of government.

Three key legislations, namely the Local Governance Operations Act of 2017, the National Natural Resources and Fiscal Commission (NNRFC) Act of 2017 and the Inter-governmental Financial Management (IGFM) Act of 2017, now govern the division of revenue mobilization powers and revenue assignment between different government bodies.

The new reforms provide local governments, municipalities in particular, a number of revenue handles for their own resource mobilization, including local taxes (such as land and property tax, local business tax and motor vehicle tax), charges and fees on locally provided public goods and services, and property rental contributions. Local taxes account for the largest share (48.6 per cent) of own source of revenue for municipalities, followed by service charges and fees (42.4 per cent).9 However, the most productive and buoyant tax handles (such as income tax, value added tax, customs and excise) will remain in the hands of the central government, which is expected to retain some 80 per cent of the current general government revenue.10

The transition to a federal system is taking place at a time when Nepal’s public revenue performance has been strong, providing desirable fiscal space for the transition to be successful. However, the skewed division of revenue between central and subnational governments and the vast gaps in economic strength of different local

7 InternationalMonetaryFund(2018).8 Presentation by the General Department of Taxation of Cambodia. Available at: https://www.imf.org/~/media/Files/News/Seminars/2017/oap-adb-

seminar-in-manila-2017/Cambodia.ashx?la=en.9 TheseissueswerediscussedatanESCAPworkshoponPublicResourceMobilizationformunicipalfinance.Seehttps://www.unescap.org/events/

workshop-public-resource-mobilization-municipal-finance10 WorldBankGroup(2018).


jurisdictions are expected to lead to both vertical and horizontal fiscal imbalances.11 To reduce the latter, intergovernmental fiscal transfers to fund subnational expenditures and reduce spending disparities across local jurisdictions could play an important role.

Nepalese municipalities currently receive four different types of grants: the fiscal equalization grant from the central government, the conditional grant, supplementary grant and special grant from separate funds. Rationalizing the mechanisms and administrative procedures for assigning and managing these grants for greater efficiency, transparency and accountability would be key for the new federal system to function well.

Strengthened efforts on own source revenue mobilization at the subnational level would also be crucial to address the financing for development challenges at the subnational level. Per capita expenditure on urban infrastructure, for example, stood at an extremely low level of $47 in 2017, and public resources are expected to only be able to cover some 30 per cent of the total urban infrastructure financing demand in the coming years.

The Comprehensive Tax Reform Program of the PhilippinesIn the Philippines, the first package of the CTRP, the Tax Reform for Acceleration and Inclusion (TRAIN), came into effect on 1 January 2018. As a major tax reform effort in years, the CTRP program aims at making the tax system simpler, more efficient, more equitable and also more revenue productive to support the government’s infrastructure investment and development agenda.

This first package has prioritized reforms on the PIT, the value added tax (VAT), and excise taxes. These reforms are complemented by measures such as earmarking a portion of the incremental revenues generated by the reform package for targeted transfers to the poor and vulnerable sectors. A supplementary Tax Amnesty Bill was

also introduced by congress as a complement, which lifts bank secrecy laws, promotes automatic exchange of information with tax authorities of other nations, and includes three types of tax amnesties.

The reform on the PIT is a long awaited one as the old PIT brackets were not indexed to inflation and haven’t changed since 1997. This led to bracket creep as inflation boosts taxpayers’ nominal income while their real income may have not changed. Such a phenomenon unduly pushes the poor into the PIT system and is also largely regressive as the top income earners would not be subject to higher PIT rate (Manasan, 2018). The reform introduced a new PIT rate schedule to offset the accumulated distortions due to inflation, simplified the rate structure from seven brackets to six, and increased the top PIT rate from 32 per cent to 35 per cent. The reform also eliminated most PIT deductions in the old regime, keeping only the most important ones such as the exclusion of insurance/retirement benefits, pensions, and 13th month pay. The reform is expected to un-tax the poor and lower PIT burdens on everyone, with the only exception of those whose income fall into the top PIT bracket (Manasan, 2018).

The main policy thrust of TRAIN on the VAT is on broadening the tax base through eliminating unnecessary or non-essential exemptions. Prior to the reform, the VAT regime applied zero-rate on thirteen major categories of goods and serves and also provides numerous exemptions.12 This has not only significantly eroded the VAT base but also added to tax administration and compliance costs. However, on this front the reform has only been a partial success. A number of proposed measures in the original TRAIN proposal failed to be included in the final bill, such as reducing exemptions on cooperatives, and the overall revenue mobilization effect is estimated to be rather limited (Manasan, 2018).

11 Verticalfiscalimbalancesarefiscalimbalancesbetweencentralandsubnationalgovernments,withsubnationalgovernmentshighlydependentonfiscaltransfersfromcentralgovernment.Horizontalfiscalimbalancesareimbalancesinrevenueandexpenditureacrosssimilartiersofsubnationalgovernments.

12 When zero-rate is applied to a good or service, the producer or provider doesn’t need to pay the VAT but can still claim VAT refund on the inputs used. In contrast, in the case of VAT exemption, the producer or service provider doesn’t need to pay VAT but cannot claim VAT refund on inputs either.


In contrast, TRAIN made good progress on taxing public “bads” through excise tax. The excises on cigarettes, petroleum products, automobiles, coal and certain minerals were increased, and a new excise on sweetened beverages was introduced. The total revenue gains from these reforms are expected to amount to 1 per cent, 1.3 per cent and 1.6 per cent of GDP respectively in 2018, 2019 and 2020 (Manasan, 2018). The greatest gains though, are the positive social-environmental impacts of these changes. The health expenditure saving from less sweetened beverage and cigarette consumption alone is likely to significantly outweigh the revenue gains. However, the introduction of these changes coincided with a continuous depreciation of the Philippine Peso and a rebound in oil prices, which added to inflation pressures in 2018.

As a whole, TRAIN is expected to increase revenue mobilization in the long run despite moderate revenue setbacks immediately after introduction of the law due to mainly one-off shocks (Manasan, 2018). It is expected to also deliver on its promises of economy-wide gains and fairness, by improving the tax system's efficiency, creating positive incentives for more responsible and healthier consumption, and rationalizing the rate structure of the PIT. Most of the reform items, including increases in excise taxes, are either generally progressive or neutral. The incorporation of compensatory measures such as earmarking part of the revenue gains for the poor and vulnerable sectors also added to the overall progressivity of the reform and helped to secure public support. Its success in bundling revenue losing reforms with revenue gaining reforms in a comprehensive legislative package is also notable, because it has helped to hedge against the risk that only the former will be cherrypicked by Congress. These are useful lessons for other developing countries with similar reform ambitions.

TRAIN is only a start, and three subsequent packages of the CTRP have already been lined up. Package 2 will focus on corporate tax systems and universal healthcare. Package 3 will target property taxes, especially the persistent problems with property value assessment. Package 4 will address capital income and financial taxes.13 These ambitious reforms would not only change the taxation landscape it the Philippines but also generate useful insights on how comprehensive tax reforms can be designed and pushed through in the context of developing countries.

The Way ForwardRecognizing the importance of tax revenues and strong fiscal positions in effectively pursuing the 2030 Agenda for Sustainable Development, three main themes of tax and fiscal reforms in the Asia-Pacific region in coming years could be: (i) comprehensive tax reforms to optimize tax structures, tax incentives and policies, along with strengthening tax administrations; (ii) adjustments in central-local fiscal relations to improve the overall revenue mobilization and public expenditure efficiency; and (iii) cross-border tax cooperation to prevent base erosion and address shared challenges such as the digital economy. The first theme includes the use of progressive taxation and environmental taxation to support the achievement of the SDGs.

The sustainability and quality of the region’s economic growth, ongoing urbanization, as well as regional economic cooperation and integration would to a large extent hinge on the success of these reforms. For domestic reforms, knowledge sharing among peer policy makers and technical and capacity support from multilateral organizations and development partners would continue to play an indispensable role. In this regard, the United Nations platform, including regional bodies such as ESCAP’s Committee on Macroeconomic Policy, Poverty Reduction, and Financing for Development, can have an important role to play in facilitating regional coordination and strengthening global efforts on international tax reforms.

13 See Department of Finance’s webpage on CTRP at: http://www.dof.gov.ph/taxreform/.


A.2 Reducing Illicit Financial FlowsIllicit financial flows, defined as money illegally earned, transferred or utilized across borders (World Bank Group, 2017), includes both earnings from illicit actions such as bribery, corruption or drug trafficking, and earnings from genuine business that become illicit when transported across borders, such as in the case of tax evasion. Illicit financial flows can generally be grouped into three categories that are not mutually exclusive: flows originating from transnational criminal activities, corruption-related flows, and tax-related illicit financial flows.

Regardless of how illicit financial flows are defined, it is clear that they have a significant impact on development because they lead to losses in tax revenues, adversely affecting governments’ abilities to finance the SDG. In addition, corruption among political and administrative actors, which contributes to illicit financial flows, undermines confidence in countries’ governance capabilities, which negatively impacts on voluntary tax compliance, decreases investment, and creates incentives for capital flight (Lain and others, 2017). For these reasons, it is important to understand how and why money flows out of developing countries and to devise strategies to stem these flows.

Given the difficulties to obtain data on illicit financial flows related to transnational criminal activities and corruption, this section focuses only on two tax-related illicit financial flows: trade misinvoicing and BEPS. It should be noted that BEPS practices are not always illegal because of differences in countries’ legal standards, as well as in different interpretations and acceptance of norms on international taxation (Inter-agency Task Force on Financing for Development, 2017). However, a purely legalistic interpretation of illicit financial flows is likely to underestimate their magnitude in lower-income countries, which have weaker legal frameworks and capacities to enforce them (Cobham, Alex and Petr Jansky, 2017b).

Due to the absence of reliable periodic data, the indicators of trade misinvoicing and BEPS presented below are based on research studies on both subjects. Their aim is to provide a sense of the magnitude of the two kinds of illicit financial flows.

Trade misinvoicing occurs when either imports or exports are deliberately under or over-priced on customs declarations with the aim of moving funds across the border to avoid taxes, bypass capital controls or hide ill-gotten gains. The motivation for each type of misinvoicing is different. For instance, a trader might want to understate the value of imports to avoid import duties and overstate the value of exports to collect more export subsidies. Similarly, a trader may understate export values or overstate import values to bypass capital controls and evade income tax.

ESCAP calculations for 2016 show a total amount of misinvoiced inflows of $660 billion and misinvoiced outflows of $650 billion.14 ESCAP also estimated that the losses of tax revenues due to trade misinvoicing amounted to $190 billion in 2016, representing, on average, 0.7 per cent of the region’s GDP and 3.8 per cent of the region’s total tax revenues. Panel A of Figure 3 shows estimates of tax losses due to trade misinvoicing by country. More than half of the estimated tax loss of $190 billion comes from losses on taxes on business profits and about a quarter from excess refunds on consumption taxes, while losses of tariff revenue represents only 7 per cent (Kravchenko, 2018). For the median country the tax loss is 7 per cent of tax revenues, and losses are significantly lower for developed countries, at less than 3 per cent of tax revenues.

14 Misinvoicedtradeflowswereestimatedthroughcomparingmatchingimportandexportdeclarationdatafor31Asia-Pacificcountriesforwhichdatawasavailablein2016.SeeKravchenko(2018)fordetails.


In addition to trade misinvoicing, current international tax rules and differences in domestic tax rules among countries create gaps that are used by multinational corporations to shift their profits between tax jurisdictions to avoid taxation.15 While tax planning techniques, such as intellectual property tax planning, which aims at reducing taxes paid by multinational corporations by allocating valuable IP expenses to low-tax jurisdictions, are legal, The existence of varied and weak tax systems in some countries and the banking secrecy policies of some jurisdictions allow for corporate and private financial wealth to be relocated around the world to tax havens under a grey framework of legality of low or no-taxation.

Figure 3 shows two sets of estimates of tax losses due to BEPS practices by Crivelli and others (2016) and Cobahm and Jansky (2017a). For the countries shown in the figure, the total value of tax losses ranges between $192 billion and $239 billion, comparable in magnitude to the estimated tax losses due to trade misinvoicing. The median loss per country ranges between 6.7 per cent and 7.7 per cent of total tax revenues, and the losses for developed countries range between 1.9 and 2.8 per cent.

In sum, estimates show that losses of tax revenues due to two kinds of illicit flows, trade misinvoicing and BEPS practices, are substantial, especially for developing countries. These findings underpin the importance of the Addis Ababa Action Agenda’s commitment to reduce them

Figure 3. Estimated tax losses due to trade misinvoicing and BEPS, percentage of tax revenues Panel A. Tax Losses due to Misinvoicing, 2016 Panel B. Tax Losses due to BEPS, 2013

0 5 10 15 20 25

Lao PDRArmeniaAustraliaMyanmarMongolia

New ZealandRussian Federation

AzerbaijanTurkeyJapan

Sri LankaIndia

ChinaGeorgia

IndonesiaSolomon Islands

PalauSingapore

FijiKazakhstan

Republic of KoreaMaldives

SamoaPakistan

KiribatiThailand

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Malaysia

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Percent of tax revenues

Crivelli and others, 2016

Cobham and Janský, 2017

Sources: Panel A – ESCAP based on data from UNCTAD, CEPII and World Bank. Panel B – ESCAP based on data from Cobham and Jansky (2017a), United Nations National Accounts Main Aggregates database, and IMF World Revenue Longitudinal database. Notes: For methodological details see Kravchenko (2018), Cobham and Jansky (2017a) and Crivelli and others (2016).

15 Thailand’s multinational enterprises, for example, have progressively channeled funds overseas in the form of conglomerate investment in tax haven countries. See, e.g., Subhanij and Annojarn (2016).

11FINANCING FOR DEVELOPMENT IN ASIA AND THE PACIFICHighlights in the Context of the Addis Ababa Action Agenda - 2019 Edition

significantly by 2030. Because illicit financial flows involve movements of money across tax and customs jurisdictions, reducing them requires strengthened inter-jurisdictional cooperation at the bilateral, regional and global levels.

Policy Actions during 2017-2018An important recent regional initiative to foster cooperation between customs and tax offices is the “Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and the Pacific” adopted on 19 May 2016 by the members of the United Nations Economic and Social Commission for Asia and the Pacific (E/ESCAP/RES/72/4). The Agreement, which promotes the digitalization of trade processes to enable the seamless electronic exchange and legal recognition of trade-related data and documents across borders, is expected to greatly reduce transaction times and costs. In addition, by sharing information across jurisdictions on customs declaration, the agreement will also provide governments with an effective tool to combat misinvoicing. In 2017 five Asia-Pacific countries – Armenia, Bangladesh, Cambodia, China and Islamic Republic of Iran – signed the Framework Agreement, while Azerbaijan acceded to it in March 2018.

With regards to base erosion and profit shifting, the OECD/G20 BEPS Project recommended countries to adopt 15 BEPS Actions in 2015 with two main objectives: (i) to adapt the international taxation architecture to the new challenges of tax avoidance and evasion linked to cross-border trade, multinational corporation operations and the digital economy, and (ii) to equip countries with a new set of domestic and international instruments to tackle such challenges. The project was expanded in 2016, through the creation of the Inclusive Framework on BEPS, to effectively engage countries which were not members of the initial OECD/G20 BEPS Project in the discussion and implementation of the BEPS Actions.16

The participation of Asia-Pacific countries and jurisdictions in the BEPS Project and the Inclusive Framework has continued to increase in recent years. As of February 2019, 25 ESCAP members and associate members have joined the Inclusive Framework.17 Seven Asia-Pacific countries also signed up to the Multilateral Convention to Implement Tax Treaty Related Measures, under BEPS Action 15 in the past year, increasing the total count of ESCAP countries and jurisdictions in the program to 17 as of Feb 2019.18

This growing participation of Asia and the Pacific reflects a greater awareness of countries and jurisdictions in the region about the BEPS Project, its importance and its potential benefits for tax base protection. It also reflects greater readiness of the developing countries of the region to adopt the new principles and practices advised by the BEPS Project.

Many Asia-Pacific countries have taken concrete steps in preparation and implementation. Given the comprehensive scope of the BEPS Action Plan and the different development levels and domestic context, different countries have chosen different strategies and focus areas. Australia has been a front runner in the BEPS policy debate and implementation and has taken action in almost all BEPS action areas. Japan, Republic of Korea, and New Zealand, as OECD members of the region, also introduced comprehensive legislative changes and policy measures along the BEPS Action Plan recommendations.

In contrast, most Asia-Pacific developing countries are still at the preparatory stage for implementation, and they have adopted more focused strategies. In particular, they have put much emphasis on BEPS Action 1 on digital economy, Action 4 on interest deductions and financial payments, Action 6 on treaty abuse, Actions 8-10 on transfer pricing, Action 13 on transfer pricing documentation, and Action 14 on

16 The BEPS Inclusive framework allows its members to choose the BEPS Actions they would like to focus on and decide on the sequence and pace of their implementation, except for four minimum standards that are expected to be implemented by all the members: measures on harmful tax practices (action 5), treaty abuse (action 6), country-by-country reporting (action 13) and dispute resolution mechanisms (action 14).

17 Armenia; Australia: Brunei Darussalam; China; Cook Islands; Georgia Hong Kong, China; India; Indonesia; Japan; Kazakhstan; Macao, China; Malaysia; Maldives; Mongolia; New Zealand; Pakistan; Papua New Guinea; Republic of Korea; Russian Federation; Singapore; Sri Lanka; Thailand; Turkey and

Viet Nam.18 Armenia; Australia; China; Fiji; Georgia; Hong Kong, China; India; Indonesia; Japan; Malaysia; New Zealand; Pakistan; Papua New Guinea; Republic of

Korea; Russian Federation; Singapore and Turkey.


dispute resolution. The larger emerging market countries, including China, India and Indonesia, have been more active and more widely engaged in the BEPS debate and implementation on multiple fronts.

For most smaller developing countries of the region, however, the policy priorities have been guided by the four BEPS minimum standards, namely Action 5 (countering harmful tax practices), Action 6 (preventing treaty abuse), Action 13 (transfer pricing documentation) and Action 14 (enhancing dispute resolution), established to facilitate a coordinated implementation. All members of the BEPS Inclusive Framework are expected to comply with these four minimum standards and are subject to an ongoing peer review process to ensure timely and consistent implementation (Ernest and Young, 2018).

A number of Asia-Pacific countries and jurisdictions participated in the peer review on the four minimum standards in 2018, marking the first year for the rolled-out peer reviews and reporting on the results. However, further work is needed to understand these first waves of results on a case-by-case basis.

The Way ForwardReducing illicit financial flows is a target of Sustainable Development Goal 16. The benefit of stemming such flows goes beyond stopping capital flight, as they could provide a much-needed increase in tax revenues to the developing countries. Reducing trade misinvoicing, in particular, is a low-hanging fruit that could substantially contribute to reducing illicit financial flows and corresponding tax avoidance.

A prerequisite to tackling trade-misinvoicing is ensuring that customs have sufficient resources to examine whether financial transactions between traders correspond to the value of traded goods. In response to the risk of trade misinvoicing, customs should be equipped with sufficient mandate and resources to tackle over-invoiced imports intended to disguise capital flight as a form of trade payment, under-invoiced exports

intended to conceal trade profit abroad such as tax havens, and over-invoiced exports or under-invoiced imports intended to bring illicit proceeds into the domestic legal financial system.

Regarding the BEPS Actions package, the main challenge is to ensure its suitability to the diverse needs and policy contexts of the Asia-Pacific developing countries. In general, the region lacks well-established legal and institutional frameworks by the OECD standards and is characterized by unique business cultures, such as the dominance of family-owned large conglomerates. As a result, implementing the BEPS package, which is largely rooted in European models and practices, could prove extremely difficult in developing Asia and the Pacific. Identifying the unique regional challenges and developing corresponding regional solutions to support the implementation of the BEPS package will be important for its success.

In addition, adopting the highly complex concepts, rules and practices proposed by the BEPS package could prove an overwhelming task for many developing countries of the region which have limited skilled staff, resource and tax administration capacities. International organizations, specialized agencies and development partners need to play a more proactive role in supporting these countries to implement the BEPS package through technical assistance and capacity building programs. It is also necessary to strengthen regional tax cooperation bodies and peer learning platforms to provide closer support on the ground.

B. Domestic and International Private Business and Finance

The Addis Ababa Action Agenda emphasizes the need to unlock the transformative potential of people and the private sector to support sustainable development (United Nations, 2015a, para. 5). In that regard, the Agenda recognizes the need for both public and private investment to contribute to infrastructure financing, including through development banks, public-private partnerships (PPPs), and blended finance (para.


48). To facilitate the participation of the private sector in infrastructure financing, the Agenda highlights the need to develop domestic capital markets (para. 44) and to encourage long-term institutional investors, such as pension funds and sovereign wealth funds, to allocate a greater percentage of their investments to infrastructure (para. 47). The Agenda notes that while foreign direct investment can make an important contribution to sustainable development (para. 45), it continues to largely side-line least developed countries (para. 46). In addition, the Agenda emphasizes the need to promote financial inclusion (para. 39) and to promote access to finance by micro, small and medium-sized enterprises (para. 43). This section discusses key issues and reviews recent policy actions in Asia and the Pacific in these areas.

B.1 Infrastructure Finance and Capital Market Development

The Economic and Social Survey for Asia and the Pacific (ESCAP, 2019) provides estimates of the financial gap that the region needs to cover in order to achieve SDGs related to infrastructure. The financial gap is defined as the difference between investment needs to achieve those goals and current investment in infrastructure. The Survey finds that developing countries in the Asia-Pacific region would have to invest an additional 1.34 per cent of the GDP per year in transport, ICT and water and sanitation infrastructure plus 1.26 per cent of the GDP per year to achieve SDG 7 on affordable and clean energy for all.

Figure 4 shows the annual financial needs for transport, ICT and water and sanitation for each of the ESCAP subregions. The figure shows that about three quarters of the needs consist of additional investments required to meet new demand arising from higher income, population and urbanization, as well as for maintenance of new and existing infrastructure. The remaining quarter is required to make the investments climate-resilient.19 In addition, the figure shows that the investment needs in the small island developing States of the Pacific is more than twice as large as the average for the developing countries in the region.

Figure 4. Annual Financial Needs to Reach Infrastructure-Related Sustainable Development Goals in Developing Asia-Pacific Countries

A. Transport, ICT and Water and Sanitation, Including Climate Resilience

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New demand and maintenance Climate-resilience

Source: ESCAP.Note: Estimations for the developing counties in Asia and the Pacific and East and North-East Asia exclude China and the Republic of Korea. Singapore has also been excluded from these estimates. Due to a lack of reliable estimates of the current level of public investment in infrastructure, the Pacific subregion includes only Fiji, Kiribati, and Solomon Islands.

B. Clean Energy for All

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Electricity access, including clean cookingEnergy efficiencyRenewables

Source: ESCAP based on data from International Energy Agency. Note: For details, see ESCAP (2019), Chapter 3, Section 2.4.

19 ESCAP Survey calculations are broadly in line with previous studies. For instance, ADB’s 2017 Meeting Asia’s Infrastructure Needs estimated an annual infrastructure need of 5 per cent of GDP, of which half was in the energy sector. ESCAP estimates the needs in the energy sector separately, using scenarios developed by the IEA in the context of meeting Sustainable Development Goal 7 targets.

Perc

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It should be noted that currently two thirds of infrastructure investment are funded by the public sector, while one third is funded by the private sector (ADB, 2017, figure 5.4 panel B). Furthermore, between 2015 and 2016, the private sector participation in infrastructure investment in emerging markets dropped by 37 per cent, reaching the lowest level, as a percentage of the GDP in 10 years (Harris and Chao, 2017). Although private investment recovered in 2017 and 2018, it remains low compared with historical levels (World Bank, 2018). As shown in panel A of Figure 5, private infrastructure investment also declined in Asia and the Pacific, from an annual average of $64 billion per year from 2008-2012 to $50 billion from 2013-2017, reaching a low of $20.4 billion in 2016, the lowest level since 2005. This suggests that while the importance of mobilizing additional public domestic resources to fund infrastructure investment projects cannot be underestimated, it is also necessary to understand why private investment is declining and what countries can do about it.

50 per cent of the total private infrastructure investment in Asia and the Pacific between 2003 and 2017 went to the South and South-West Asia subregion, more than 90 per cent of which concentrated in India and Turkey. During that period, around 80 per cent of the total private investment in infrastructure in the region went to six countries: China, India, Indonesia, Pakistan, Turkey and Viet Nam. As shown in panel B of Figure 5, in the period 2013-2017, most investments were directed to energy (49 per cent) and transport (48 per cent), but the composition varies over time. Private infrastructure investment in the region has mostly financed greenfield projects (67 per cent), followed by brownfield projects (18 per cent), divestitures (14 per cent) and management and lease contract (1 per cent).20

The development of the region’s capital markets can contribute to enhancing the role of the private sector in financing infrastructure. In most countries of the region, however, capital markets have low levels of capitalization and liquidity, with

turnover ratios below the world average. This lack of liquidity can increase transaction costs, which in turn renders the efficient allocation of resources difficult. As a result, firms in the region disproportionately rely on commercial banks rather than capital markets for their funding.

Figure 5. Public-Private Partnership in Asia and the PacificA. Subregional Composition, 1998-2017

0

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1998 - 2002 2003 - 2007 2008 - 2012 2013 - 2017

B. Sectoral Composition, 2013-2017

Energy

Transport

Water and sewerage ICT

Source: ESCAP based on data from World Bank (2017). Private Participation in Infrastructure Database. Available from https://ppi.worldbank.org/.

Supporting domestic investors is an important aspect of capital market development. There is a high correlation between the size of the domestic institutional investor base and the size of capital markets (ESCAP, 2015). This observation points to the importance of developing a critical mass

20 Ingreenfieldprojectsaprivateentityorpublic-privatejointventurebuildsandoperatesanewfacilityfortheperiodspecifiedintheprojectcontract.Brownfieldprojectsaresimilarexceptthatinsteadofbuildinganewasset,theprivateentitytakesoveranexistingassetandimproves,rehabilitatesorexpandsit.Inadivestitureaprivateentitybuysanequitystakeinastate-ownedenterprisethroughanassetsale,publicofferingorprivatizationprogramme,anditassumesfullresponsibilityforitsoperations,maintenanceandinvestment.Formoredetails,seeWorldBank(2019),PrivateParticipationinInfrastructureDatabase,availablefromhttp://ppi.worldbank.org/methodology/glossary.

Billi

ons

of $

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of long-term domestic institutional investors to support financial deepening as these investors play a catalytic role in capital market development. In addition, domestic institutional investors have liabilities in local currency and are more willing to invest in their own currency. Unfortunately, the size of the domestic investors is presently relatively limited in the region despite the presence of sizeable social security and public pension schemes in some countries. Additional efforts should, thus, be undertaken to support the emergence of a larger base of domestic investors.

The presence of the domestic institutional investors might, however, not be sufficient to channel more funds to infrastructure projects as many of them lack required skills and expertise to evaluate and manage the risks of infrastructure projects. To address this issue, those local investors could use external fund managers or partner with experienced international investors.

Policy Actions during 2017-2018Governments have been active in the region in undertaking a host of policy actions that will contribute to increasing financing available for infrastructure projects. This section reviews some policy measures in three areas: public sector financing, private sector financing through PPPs and private sector financing through capital market development.

Public Sector Infrastructure FinancingEnhancing the efficiency in public spending on infrastructure projects results in significant savings which can be channeled into greater public-sector financing. There are different measures that governments have introduced to realize these efficiency gains.

Given limited resources and competing priorities, one measure governments have taken is to prioritize their investments, through guidelines for appraising infrastructure projects. The 11th Malaysia Plan, launched on 21 May 2015, is an example of prioritization efforts. Priorities include building an integrated need-based transport

system; improving digital infrastructure; transiting to new water services industry; and encouraging sustainable energy use. Subsequently, Malaysia has announced several major infrastructure projects, including additional mass rapid transit (MRT) and light-rail transit (LRT) lines.

Significant gains have also been realized during the delivery of infrastructure projects for instance by streamlining permit approvals, facilitating land acquisition and improving public procurement practices. In terms of improving public procurement and enhancing governance, for example, the Government of Viet Nam has undertaken a number of steps recently to bolster its anti-corruption regime and enforcement efforts as recommended in the United Nations Convention agaist Corruption (Tilleke and Gibbins, 2018). On the legislative front, the Government introduced the New Penal Code, which went into effect on 1 January 2018. The New Penal Code extends the application of certain corruption-related offences to those working in the private sector and criminalizes the giving of a bribe to foreign officials and officials of public international organizations.

The Government of Indonesia has also developed 13 economic policy packages focusing on the deregulation of investment and tax incentives. The packages help attract investments in infrastructure development projects by accelerating the process of licensing and establishing greater legal and business certainty (World Bank, 2018). The Indonesian Government’s funding for infrastructure projects also jumped by over 20 per cent in the 2017 budget, and now stands at 2.5 times what was allocated three years ago. This has been supported by an extensive ongoing tax reform agenda to boost public funds, including a tax amnesty programme between 2016 and 2017.

Apart from improving the efficiency of public spending, governments have also attempted to increase public spending through increasing available fiscal resources. This has been done in some countries through tax reforms directly


tied to infrastructure spending. For example, the Philippines “Build, Build, Build” (BBB) programme anticipates $180 billion in total investment from 2017 to 2022. This will be partly funded by a comprehensive tax reform package approved in 2017.

Private Sector Financing through Public-Private Partnerships (PPP)For private sector financing through PPPs, close to three quarters of the region’s countries have enacted PPP laws or adopted dedicated PPP guidelines, with ten of them upgrading their legal and regulatory frameworks in the last three years. At least 13 countries in the region have established project preparation facilities to develop a pipeline of bankable projects, often with the support of international finance institutions, which also have well-endowed facilities for this purpose. Among 42 Asia-Pacific countries reviewed, 20 have established central PPP units, three countries have multiple central entities responsible for PPPs and six countries had PPP units under development.

In order to enhance the knowledge and capacities of PPP units in the region, ESCAP has taken the initiative of setting up an infrastructure financing and PPP network in Asia and the Pacific. The first meeting of the network took place in Guiyang, Guizhou Province, China on 12 and 13 September 2018 in partnership with the China Public Private Partnerships Center. The event gathered the heads of PPP units, infrastructure financing specialist and capital market experts from 23 countries in the region to enhance knowledge and capacity of PPP units as well as other infrastructure financing strategies to support the pursuit of sustainable infrastructure development.

As an example of such regulatory developments, Viet Nam enacted its first PPP Decree in 2015, which was successively replaced by a new decree in 2018.21 Key aspects of those decrees are to: (i)

establish guidelines regarding the identification, preparation, implementation and disclosure of PPP projects; (ii) introduce new PPP models and provide a simplified framework for unsolicited proposals; (iii) increase flexibility for lender’s rights and use of foreign arbitration; (iv) expand the Government’s financing for PPP projects; and (v) tighten regulations such as higher minimum equity requirements and stricter PPP projects transfer conditions. The new Decree also provides a number of financial incentives to attract private investors. For instance, investors who make investments under the PPP model will have preferential corporate income tax rates, reductions or exemptions of land rental fees and preferential treatment for import/export duties. These investor-friendly reforms support Viet Nam’s growing infrastructure needs in the coming years through creating a more transparent regulatory system.

The Government of Kazakhstan, which had introduced a PPP framework in 2006, established its PPP center in 2008 and has attempted to improve its PPP legislation along the way.22 The most recent amendments to its PPP Law aims to smoothen PPP appraisal procedures by reducing required steps from five to three as well as reducing the approval period from seven to three months.23 The Government also aims to develop robust PPP plans to attract more private investors while allowing flexible PPP schemes to meet various sector specific needs. One of the recent PPP projects in Kazakhstan is the Big Almaty Ring Road.24 The concession was signed in February 2018 between the Government and a private consortium between Turkey and the Republic of Korea with a total investment of 740 million US dollars for construction of a new 66-kilometer ring road.25 This road serves as a key link in the New Silk Road transnational highway and is expected to alleviate traffic congestion in the nation’s most populous city, Almaty.

21 Formoreinformation,seeKPMG:LegalUpdate(June2018)availablefromhttps://home.kpmg/content/dam/kpmg/vn/pdf/Legal-Update/KPMG%20Legal%20Update%20-%20Decree%2063%20EN.PDF.

22 ESCAP(2018).FirstMeetingofthePublic-PrivatePartnershipandInfrastructureFinancingNetworkofAsiaandthePacific.Availablefromhttps://www.unescap.org/sites/default/files/4-5.%20Presentation_KZ_Guyang_UNESCAP-2.pdf.

23 For details, see http://blogs.worldbank.org/ppps/rebooting-vietnam-s-ppp-program-legislation-builds-lessons-learned. For further information, see24 Forfurtherinformation,seehttps://astanatimes.com/2018/04/ppps-have-reduced-burden-on-kazakh-budget-by-282-million/.25 IFC(2018).PPPstories-Kazakhstan:AlmatyRingRoad.Availablefromhttps://www.ifc.org/wps/wcm/connect/325cbe73-82e0-4676-8813-

059e7f1bcea3/PPP-Stories-Almaty-Ring-Road-2018.pdf?MOD=AJPERES.


In terms of outcomes in growth of PPP projects, two substantive examples can be seen in China and the Philippines. China has developed demonstration projects worth $285 billion and pipeline projects of around $1.7 trillion as of December 2017; and the Philippines has about 30 projects in different stages of development valued at close to $1 billion with 14 projects already awarded.

A recent innovation has been the use of PPPs to finance the development of healthcare infrastructure. A 10-year PPP agreement was recently signed between the Government of Kyrgyzstan and the Fresenius Medical Care, a global leader in dialysis treatment.26 This is not only the first PPP project for Kyrgyzstan but also the first healthcare PPP in Central Asia. IFC has also helped other countries deliver better healthcare infrastructure through structuring specialized PPPs. Another example includes two newly-established dialysis centers in Bangladesh, which have raised the nation’s capacity to provide reliable dialysis services. As healthcare has seen a growing demand in developing countries in the region, well-designed PPPs can serve as an effective mechanism to facilitate citizens’ access to an affordable and quality healthcare system.

Infrastructure Financing through Capital Market DevelopmentCapital markets can play a significant role to close financing gaps in infrastructure development. Of the 53 countries in the Asia-Pacific region, 35 have a stock exchange at different levels of development. Where stock markets are developed, infrastructure companies have typically been large issuers. Thirty of the largest publicly listed infrastructure companies, that constitute the S&P Asia Infrastructure Index, had a total market capitalization of nearly $300 billion as of February 2019.27

With regards to the development of local currency (LCY) bond markets, the aggregate bonds outstanding of emerging East Asian countries reached $12.8 trillion at the end of September 2018 (Q3 2018).28 The development of these markets usually starts with the sovereign bonds segment, followed by the corporate bonds segment. The two countries with the most developed corporate LCY bond markets are Republic of Korea and Malaysia, where the share of corporate bonds outstanding was 58.3 per cent and 47.4 per cent, respectively, at the end of Q3 2018. On the other end of the spectrum, corporate bond issues represented 6.5 per cent in Viet Nam, 15.7 per cent in Indonesia, and 20.7 per cent in the Philippines.

Sovereign bonds can provide good opportunities for governments to finance public infrastructure investment projects at a competitive price and with long maturities. They allow governments to access large volumes of financial resources in the capital market and may be suitable to the risk-return mix expected by institutional investors - such as insurance companies and pension funds. Based on the international experience, specialized sovereign bond products such as tax-exempt bonds, which offer investors full or partial exemption from taxation on interest receipts, or revenue bonds, which are secured by the revenue from the projects they finance, could provide options for governments in Asia and the Pacific to finance public infrastructure projects (Regan, 2017).

Corporate bonds can also facilitate the channeling of financial resources towards infrastructure development through the capital market. For investors, they offer attractive and diversified investing opportunities, depending on their risk appetite, exit horizon, tax optimization requirements and cost of capital. In countries where there is a developed corporate bond market, the issuances have been dominated by infrastructure related companies.In order

26 IFC(2018)explainshowPPPsaredeliveringondialysis.Availablefromhttps://www.ifc.org/wps/wcm/connect/industry_ext_content/ifc_external_corporate_site/health+and+education/news/he_newsletter-issue-6_dialysis.

27 For the latest information, visit https://us.spindices.com/indices/equity/sp-asia-infrastructure-index.28 SeeAsianDevelopmentBank(2018).AsiaBondMonitor,November2018.EmergingEastAsiancountriesincludeChina;HongKong,China;Indonesia;

Malaysia; Philippines; Republic of Korea; Singapore, Thailand and Viet Nam.


to encourage the development of corporate bond markets, a number of countries enacted policy reforms. For example, the Philippines has undertaken a number of measures in recent years. One is the launch of the Expanded Primary Dealer System, which, in parallel with a reduction in the number of government debt issues outstanding, will reduce the cost of debt through competition. India enacted a comprehensive reform plan in 2016 drafted by the inter-agency Working Group on Development of Corporate Bond Market including an emphasis on: inter-agency coordination; development of key missing markets; and support for extension of partial credit enhancements. The Government of Bangladesh has also undertaken numerous policies and provided regulatory incentives under the Third Capital Market Development Programme starting in 2016 including: extending the government yield curve; catalyzing institutional investor demand; and enhancing the supply of alternative financial instruments. In 2017, Viet Nam approved a 3-year road map for bond market development, with the aim of aligning the bond market with the money market and capital market. Under the road map, the share of bonds to GDP is expected to increase to 45 per cent by 2020 and to 65 per cent by 2030.

It is worth mentioning that issuances by infrastructure-related companies have played an important role in the region’s emerging corporate bond markets. For example, in China, infrastructure-related entities, such as state-owned enterprises, are among the largest corporate bond issuers. Likewise, the corporate bond landscape of Indonesia is dominated by mining and utilities firms.

Finally, a more recent phenomenon is the increased green bond issuance activity. In fact, 2017 and 2018 have been marked as ‘the year of the sovereign’ in the green bond market in Asia and the Pacific, with Fiji and Indonesia becoming the first issuers amongst developing economies. Other infrastructure financing option

has also been developed. For instance, Thailand has successfully launched Thailand Future Fund (TFF) as a new way to raise private capital for infrastructure investment. Traded on the Stock Exchange of Thailand, the TFF is a 44.7 billion Baht infrastructure mutual fund that aims at raising capital from institutional and private retail investors for the country’s infrastructure development.29

The Way ForwardTo increase the impact of public sector involement in infrastructure financing, enhancing public expenditure efficiency has the potential to contribute significantly. To realize these efficiency gains, there are different measures that governments can consider such as master planning, improving project selection and preparation, upgrading infrastructure governance systems and considering technology-based solutions such as Building Information Modeling (BIM), Smart Cities with Big Data Centers, demand management techniques to promote infrastructure efficiency.30

In terms of increasing the role of the private sector, PPPs can play an important part in public infrastructure and service delivery. To propagate PPPs, a legal and regulatory architecture is required that provides clarity to public agencies, streamlines project delivery and gives the necessary certainty to private investors. Countries in the region can learn from each other in these areas and will benefit from a regional platform where good practices could be exchanged, for instance through the newly established UN ESCAP-supported Infrastructure Financing and PPP Network for the Asia-Pacific region.31 Increasing the role of the private sector can also be supported by mobilizing domestic resources. This can be done by a deepening of capital markets in the region as well as increasing the availability of investable assets. Further integration of capital markets in the region

29 FormoreonThailand’sexperience,pleaseseeTientip,S.andLin,D.(2018).“BridgingtheInfrastructureFinancingGap:TheRoleofthePrivateSector,”ESCAPBlog,26December,athttps://www.unescap.org/blog/bridging-the-infrastructure-financing-

30 Examples of demand management techniques in the case of transport include the promotion of flextime, a compressed work, week and telecommuting to reduce the demand for transport – and thus for transport infrastructure – in peak times.

31 Forfurtherdetailofthefirstmeeting,pleaseseehttps://www.unescap.org/events/first-meeting-public-private-partnership-and-infrastructure-financing-network-asia-and


would help to address some of these issues. Reviewing prudential regulation of countries for development of project bonds would help to encourage foreign investors. However, the first step is to develop sovereign and corporate bond markets with ample capital market regulations and physical infrastructure.

Generally, in view of the limited financial resources currently available for infrastructure development, the focus of infrastructure financing policies should be on the development outcomes of infrastructure plans. Governments should therefore prioritize investment which has the largest development impact in terms of the SDGs, using robust measurement and evaluation systems. Efforts should be made to support developing countries in building practical tools to conduct analyses that are inclusive of reducing inequalities, gender, disability and elderly population with strict adherence to climate parameters. Effectively engaging multiple relevant stakeholders in consultations on new and existing projects is necessary. It is also important that governments assess carefully the relative merits of different infrastructure financing options, including traditional loans, bonds and international infrastructure funds considering their applicability in their respective countries.

B.2 Foreign Direct Investment Amid declining external financial flows from official development assistance and foreign private bank lending, foreign direct investment (FDI) has become increasingly important as the most stable and relevant source of private external financing for development (Dar, 2015; Kharas, 2014; and United Nations, 2015c). OECD (2013) estimates that FDI accounts for around 60 per cent of external capital inflows into developing countries worldwide.

At a broader level, FDI in various countries of the Asia and Pacific region has been the driving force behind their successful economic development.

Inward FDI towards the Asia-Pacific region has increased at an annual average rate of 9.3 per cent between 1993-97 and 2013-17, exceeding the rate of growth of FDI towards the United States (7.5 per cent) and the European Union (6.3 per cent). Over the period 2013-17, the region received $550 billion per year, on average, in FDI flows, exceeding the FDI flows to the European Union ($380 billion) and the United States ($290 billion) in the same period (Figure 6). In 2017 alone, the region received $558 billion, amounting to 39 per cent of the global FDI inflows that year.

Figure 6. FDI Inflows to World Regions, 1993-2017

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Although FDI inflows to least developed countries in the Asia-Pacific region have consistently increased over the past decades, their share remains low at 1.85 per cent (0.5 percentage point increase from 2016 value) of FDI inflows to the whole region in 2017. As noted in the Addis Ababa Action Agenda, many least developed countries continue to be largely side-lined by FDI, and least developed countries in the Asia-Pacific region are no exception. FDI to these countries remains concentrated in primary industries, which exposes least developed countries to “Dutch disease” and volatile commodity prices.32

32 Dutch disease refers to the negative consequences arising from large increases in the value of a country’s currency, resulting from large influx of foreign currency. Dutch disease can lead to a decrease in the price competitiveness for exports of the affected country’s manufactured goods and an increaseinthequantityofimports.SeeTheEconomist(2014).“WhatDutchdiseaseis,andwhyisbad,”5November.Availablefromwww.economist.com/blogs/economist-explains/2014/11/economist-explains-2.

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During the last decade, developing economies from the Asia-Pacific region are increasingly investing in other developing countries within the region, according to greenfield FDI data. Intraregional FDI is estimated at nearly half of total FDI inflows in Asia and the Pacific. In particular, member countries of ASEAN attracted a significant amount of intraregional FDI inflows, partly as a consequence of China’s gradual loss of competitive advantage in manufacturing due to rising labour costs. In addition, Chinese multinational enterprises have been increasing investments abroad in both high-tech sectors and infrastructure, leading to a sharp increase in China’s outward FDI in the Asia-Pacific region, from about $10 billion in 2005 to over $40 billion in 2010 and close to $85 billion in 2017. This trend is expected to continue in coming years.

Policy Actions during 2017-2018Countries in the Asia-Pacific region continued to promote, facilitate, and liberalize investment. Between January 2017 and June 2018, 22 countries in the region adopted 74 policy measures related to FDI, accounting for 45 per cent of such policies of the global total (ESCAP, 2018). For instance, India’s revised 2017 FDI Policy introduced a new streamlined procedure for government approval, replacing the Foreign Investment Promotion Board (FIPB) with a ‘Foreign Investment Facilitation Portal’ (FIFP), an administrative body to facilitate FDI applications.

At the same time, countries are focusing on improving the quality of FDI to ensure that it brings social and environmental benefits, as well as economic benefits. For that purpose, governments have implemented various mechanisms such as net benefit tests, national security tests, and environmental and social impact assessments to evaluate the quality of FDI that comes into their countries (Sauvant and Mann, 2017). One example is the new FDI strategy of Viet Nam for 2018-2023, which focuses on priority sectors and quality of investment, and is aimed at attracting FDI in high-tech industries rather than labour-

intensive sectors. As another example, in China, the government is encouraging direct investment enterprises to invest in high-end, intelligent, and green manufacturing under the “Made in China 2025” initiative.

Foreign investors are likewise encouraged to take part in infrastructure construction in energy, transportation, water conservation, and environmental protection through franchising.

In addition to country policy actions, international investment agreements can play a significant role in facilitating investment for sustainable development. International investment agreements, however, were originally designed to protect investors from expropriation, discrimination and arbitrary treatment. Hence, many concluded international investment agreements have an inherent imbalance between investor rights and host countries’ rights to pursue legitimate development objectives (Berger, 2015). This is exemplified by the increasing incidence of investor-state dispute cases, more often based on older international investment agreements that have significant and often costly implications for host countries. With the increased risk of litigation initiated by investors, some countries have opted for a policy freeze to avoid a potentially large fiscal burden, which in turn could negatively impact policies for protecting public social and environmental rights. In this context, some countries in the region, such as India and Indonesia, have initiated the re-negotiation or termination of some international investment agreements they were party to with the aim of recalibrating the balance between the rights and obligations of the State and those of foreign investors (ESCAP, 2017b). For example, India introduced a new model bilateral investment treaty that restricts the standards of protection given to investors and sets exhaustion of local remedies as precondition for international dispute settlement (Baker McKenzie, 2017).


The Way ForwardThere are many measures governments can take to promote investment as a tool to support sustainable development. Besides reforming and strengthening national legislation related to social and environmental sustainability that applies to both domestic and foreign investment, sustainability provisions in the signed international investment agreements can also be strengthened. Already, international investment agreements are evolving steadily away from a focus on investor protection towards a proper balance between investor and host country rights and obligations. Governments can also adopt a set of sustainability criteria that can be used to monitor and evaluate the impact of FDI on sustainable development along its three dimensions.33

While investment promotion agencies traditionally pursue investment promotion strategies, it is important that they also focus on retaining good-quality investment through proper investment facilitation measures, including aftercare.34 The importance of investment facilitation is clear from the fact that in many cases announced FDI is not fully realized because of investors’ concerns about post-establishment bureaucratic obstacles. Investment facilitation is also an emerging issue of discussion at the World Trade Organization (WTO), and it should be covered in international investment agreements.35 Investment facilitation is also important to promote intraregional FDI and FDI from small- and medium-sized enterprises that need substantive support throughout the investment cycle. Through such measures, governments can also assist SMEs more efficiently, integrate them into global and regional value chains.

B.3 Micro, Small and Medium-Sized Enterprise Financing

Micro, small and medium-sized enterprises (MSMEs)constitute the largest number of companies in any country and play a fundamental role in the creation of employment, the development of skills, and the diffusion of technological knowledge. Past studies have shown that financial access helps generate new firms, which are generally vibrant and creative. However, in comparison to larger firms, MSMEs often have difficulties to access financing from the formal financial system because financial institutions, particularly commercial banks, often view providing loans to them as too risky or involving high transaction costs.

At the global level, International Finance Corporation (2017) estimated that 65 million or 40 per cent of formal MSMEs in developing countries have unmet financing needs for a total of $5.2 trillion or 1.4 times the current level of MSMEs financing of $3.7 trillion.36 In Asia and the Pacific, MSMEs have an aggregate financial gap of $3.1 trillion, or 17 per cent of the GDP, which is roughly equivalent to their current level of access to financing. This finance gap is highly concentrated in a few countries of the region, with China, India, Indonesia, and Russian Federation representing over 80 per cent of the total.

Figure 7 shows the finance gaps of MSMEs by country, as a percentage of their total financial needs. It reveals that in 15 out of 33 Asia-Pacific countries for which data is available, MSMEs are unable to meet 80 per cent or more of their financial needs. The lack of access to finance is particularly severe in least developed countries: in seven of the region’s ten least developed countries for which data is available, MSMEs are unable to meet their financial needs, ranging from 80.1 per cent in Solomon Islands to 99.3 per cent in Afghanistan.

33 ESCAP (2017e) contains advise on the development of sustainability criteria in investment policies.34 Aftercare is commonly understood as activities that investment promotion agencies undertake to retain foreign investments in the country.35 See, for instance, WTO (2017). Joint Ministerial Statement on Investment Facilitation for Development. WT/MIN(17)/59. In particular, some countries

want to focus international investment agreements on cooperation and facilitation rather than on protection.36 IFC(2017)alsoestimatesthetotalpotentialdemandforfinancefrominformalsectormicro,smallandmedium-sizedenterprisesindeveloping

countries at $2.9 trillion or 11 per cent of the GDP, bringing the total potential demand of micro, small and medium-sized enterprises, formal and informal, to $11.9 trillion or 45 per cent of the GDP.


An important recent development in financial inclusion has been the development of new companies, known as fintechs, which facilitate access to a range of financial services and are bringing down financial transaction costs by making use of software and modern technology. Example of fintechs includes cell phone apps that allow users to complete several online transactions, such as bill payments, which previously required a trip to the bank. These technologies also allow banks to extend their services to remote areas where they do not have physical presence, thus enhancing financial inclusion.

With regards to meeting financial needs of MSMEs, two fintech applications – credit scoring and alternative finance platforms – have great potential for increasing their access to credit. A major reason why MSMEs lack access to credit is the lack of information that lenders can use to assess their creditworthiness. New fintech companies, such as Ant Financial, an affiliate of

e-commerce giant Alibaba Group, or Singapore-based Lenddo, use big data analytics to calculate credit scores of consumers and small business owners. Their algorithms use data not considered in traditional credit scoring, such as credit or debit card transaction data, telecom, utility and rental data, clickstream data or social network analyses (Gandhi, 2017).

Alternative finance platforms can be defined as online channels that act as intermediaries in the demand and supply of funding to individuals and businesses outside of the traditional banking system. Alternative finance platforms for MSMEs include, among others, market-place or peer-to-peer (P2P) business lending, balance-sheet business lending, invoice trading, and crowdfunding. The total alternative finance market volume in Asia and the Pacific, including consumer lending, expanded from $103 billion in 2015 to $245 billion in 2016 reaching $362 billion in 2017. With a market volume of $358 billion in 2017, China is both the regional and the

Figure 7. Micro, Small and Medium-Sized Enterprise Finance Gaps, Percentage of their Total Financing Needs, 2017

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global leader, accounting for 99 per cent of the region’s total and largely exceeding the size of Western markets such as the United States ($43 billion) or the UK ($8 billion). Main markets, in the rest of Asia and the Pacific, include Australia ($1.15 billion), Republic of Korea ($1.13 billion), Japan ($349 million), and India ($269 million) (Cambridge Centre for Alternative Finance, 2018).

The fast emergence of big data credit scoring tools and alternative finance platforms have a large potential for enhancing access of MSMEs to finance, but they also pose enormous regulatory challenges that need to be addressed. For instance, the process that credit scoring companies use to combine thousands of data points for a single individual to obtain a credit score is not transparent, thus making it difficult to judge their accuracy. In addition, artificial intelligence algorithms to obtain credit scores may inadvertently determine eligibility to loans based on consumers’ characteristics such as gender, race, or religious and social affiliations, which may lead to discriminatory lending practices (Hurley and Adebayo, 2016). In addition to providing consumer protection, an effective financial regulation is needed for monitoring financial institutions and systemic risks and for supporting competition and impeding monopolistic and oligopolistic behaviour.

Policy Actions during 2017-2018During 2017 and 2018, a number of countries in the region have seen the introduction of new legislation, policy reforms, and private sector initiatives to support MSMEs’ access to finance. Examples include Viet Nam, Thailand, Myanmar, Tajikistan, Australia, Malaysia and Hong Kong, China.

In Viet Nam a new SMEs law took effect in 2018, providing a range of measures to support MSMEs. These included tax support, accounting procedures, access to credit through the Small and Medium-sized Enterprise Development Fund and Small and Medium-sized Enterprise Credit

Guarantee Fund. Examples of incentives include a reduction in land prices for domestic SMEs installed in industrial parks or high-tech zones and support in the access to and transfer of technology and intellectual property.

In Thailand, in the context of its economic reform process known as Thailand 4.0, the government announced new measures to ease MSMEs’ access to capital by changing regulations of bank’s lending models. Under its proposed revamp, lenders will be encouraged to apply information-based models for lending decisions rather than the revenue-based scheme currently utilized. This new model will provide access to information through an open API (Application Programming Interface) Banking Framework from the National Credit Bureau. As a result, it will facilitate collateral value appraisals and cut administrative costs for both lenders and borrowers. The Bank of Thailand (BoT) estimates that this reform will reduce both appraisal costs for Small and Medium-Sized Enterprises (SMEs) by THB 500 million (about $16 million) a year and administrative costs of current regulatory compliance requirements by THB 1 billion (about $32 million). Furthermore, the Ministry of Finance (MoF) will require financial institutions to contribute 0.001 per cent of total deposits to a dedicated SME promotional fund devoted to those SMEs, which cannot currently access capital through established lenders. The MoF predicts that this program will raise THB 100 million in contributions within the first year.37

Myanmar announced in May of 2018 that it has issued its first Credit Bureau license to a joint venture between Singapore’s Asian Credit Bureau and Myanmar Banks Association. The new Credit Bureau will ease loan access for SMEs, which currently requires collateral sometimes valued at more than 400 per cent of their loans. This high collateral requirement is due to a lack of trust between SMEs and lenders. The Credit Bureau will be able to compile financial information on individuals and businesses to facilitate and boost loan applications made by SMEs by providing timely information on borrowers (Khine, 2018).

37 Formoreinformationseehttps://www.bot.or.th/Thai/MonetaryPolicy/.../22April48_SMEsPaper_Chaipat.pdf


In addition to the establishment of a new Credit Bureau in Myanmar in 2018, a major private equity financing initiative was announced in February 2019. This initiative led by Singapore-based Ascent Capital Partners Pte. Ltd. and backed by Temasek Holdings and the Asian Development Bank will provide $100 million for the development of the SME industry in the country. A priority of this fund is to provide finance to women-led MSMEs. Loans will be provided to already established SMEs that contribute to an inclusive and sustainable economy. Sectors, which will be considered for funding, include consumer-oriented businesses, education, healthcare, technology and financial services (Lwin, 2019).

Tajikistan, in collaboration with the World Bank Group and supported by the government of Switzerland, announced in February 2019 that it has passed significant reforms for secured transactions, enabling SMEs to access financing from bank and non-bank lenders. The aim of the reforms is to create an online public collateral registry in which movable assets, such as livestock, vehicles and machinery can be registered. This registry would move the financial sector away from a revenue-based model to an asset-based model for lending, as 70 per cent of business assets in Tajikistan are reported to be movable. This will not only provide better information for loan processing by financial institutions but also make access to loans for SMEs easier while reducing their costs. It is expected that this mechanism will have significant impacts on the nation’s economic landscape by boosting business and investment.38

In Australia, Treasurer Josh Frydenberg announced in November 2018 that the government would intervene in the market by providing an AUD 2 billion lifeline to the country’s SME sector. It has been recognized that the SME sector in Australia plays a crucial role in terms of employment, employing 7 out of 10 workers. The aim of this policy is to reduce borrowing costs for SMEs. Loans will be provided to SMEs through the

country’s commercial banks for a period of 5-10 years with periodic revisions to take place every 2 years. In addition, the Australian government plans to revise its banking regulations to incentivize private financial institutions to deposit money into a dedicated growth fund. Like the UK’s current $2.7 billion government fund for SMEs, the Australian Business Growth Fund will invest directly into businesses (Crowe, 2018).

The fintech space has also made some headwinds in Asia in the past year. Fintech is dramatically transforming the financial sector landscape in Asia and the Pacific. It encompasses providing solutions that are changing the way people pay, send money, borrow, lend, and invest. The demand for fintech solutions and frameworks has also been underpinned by a rapid expansion of mobile usage and internet penetration, used increasingly by urban, literate and young populations, and un(der)served segments of consumers and MSMEs by traditional banking solutions.

Key recent developments in the fintech space have been seen in Open Banking. Open Banking referring to the use of open Application Programming Interfaces (APIs) that help developers build applications around financial institutions to improve decision-making.

Besides Thailand, which has established an open API for lenders, Hong Kong and Malaysia have created their own guidelines and frameworks to facilitate information to traditional and alternative lenders.

Malaysia’s Bank Negara published its Open Banking guidelines in September 2018. These guidelines will focus on 3 areas, namely: Motor Insurance, Credit Card information and SME financing. However, no policies have yet been created.

38 Access to Finance to be made easier for small and medium sized enterprises in Tajikistan. (2019, February 2). Newsroom. Retrieved February 27, 2019. From:https://moderndiplomacy.eu/2019/02/02/access-to-finance-to-be-made-easier-for-small-and-medium-enterprises-in-tajikistan/


Chinese regulators in Hong Kong, under the Hong Kong Monetary Authority (HKMA), have established a working framework, which has opened up 130 sets of customer data. This data covers financial information deemed important for making loan decisions. Currently, the framework will only focus on retail banking services such as transactions and account information. Nevertheless, it is predicted, if successful, to be extended to other areas in the coming years.

Making progress in ensuring that appropriate regulations are in place in the future will be essential to maximize the benefits of fintech to enhance financial inclusion. For that purpose, multilateral agencies such as the United Nations can play a vital role in raising fintech awareness among both policy makers and the private sector through regional and global dialogues with governments, technology companies, researchers, development partners, and regulators from developed and developing economies. This will assist countries in the region in identifying best practices and building appropriate business models and regulatory institutions for the emerging fintech sector. In this regard, UNESCAP has developed a comprehensive framework for studies on MSME financing in the region, including the fintech sector, which were already conducted in Nepal and Cambodia. Additional studies in other developing countries of the region will facilitate knowledge exchange and the identification of good practices to foster the development of the MSME sector.

The Way ForwardFinancial inclusion will continue to be one of the main topics of discussion in Asia and the Pacific, with technology and innovation increasingly shaping the business model for financial services and for products to reach un(der)served individuals, entrepreneurs and MSMEs. With regards to the latter, several policy options and reforms are available to enhance their access to financing. One of them is to improve countries’ lending infrastructure, which includes credit bureaus, credit guarantees agencies and

collateral registries. It is particularly important to make available more and better information about MSMEs credit risks. A useful model from the Asia Pacific region is the Credit Risk Database of Japan. This database is managed by the Credit Risk Database Association, and its members include credit guarantee corporations and financial institutions (Kuwahara and others, 2015).

National development banks can also play a significant role in promoting and expanding financial inclusion of micro, small and medium- sized enterprises through innovative products to help overcome market failures as well as create new markets from which commercial financial institutions can also benefit. A recent example is the Korean Development Bank, which has launched a number of initiatives to support micro, small and medium-sized enterprises that develop new technologies or that support the creative economy, including a growth accelerating programme to provide venture capital companies and start-ups not only with funding but also with networking opportunities and mentoring support (UNCTAD, 2016).

Finally, a major issue concerning the development of fintechs and alternative financial platforms, is how to balance the setting of appropriate regulations to protect consumers and prevent systemic financial risks, while continuing to encourage innovation in this sector. In this regard, two main approaches have been employed in the region. On one hand, China, the regional and global industry leader, has prioritized innovation but was able to step up regulatory efforts to protect consumer from fraud after a series of high-profile scandals. On the other hand, economies such as Australia; Hong Kong, China; Malaysia; Singapore and Thailand have implemented regulatory sandboxes to allow innovations in limited market segments.39 It will be important to understand which approach is most effective to promote the development of the fintech sector in other countries of the region.

39 ChinaDaily(2017).Centralbanktoregulaterapidlygrowingfintech,8August.Availablefromhttp://www.chinadaily.com.cn/business/2017-08/08/content_30365345.htm.


C. International Development CooperationThe Addis Ababa Action Agenda highlights the critical role of international public finance in complementing domestic public resources, especially for the poorest and most vulnerable countries, and it commits to maximize its effectiveness, transparency, impact and results (United Nations, 2015a, para. 50). The Agenda reiterates that the fulfillment of official development assistance (ODA) commitments by many developed countries – including the target of 0.7 per cent of ODA/gross national income and of 0.15 to 0.20 per cent of ODA/gross national income directed to least developed countries – remains crucial (para. 51). The Agenda recognizes the importance of focusing the most concessional resources on those with the greatest needs and least ability to mobilize other resources (para. 52), and it points out the potential of ODA to catalyze additional resource mobilization from both public and private sources (para. 53). The Agenda also notes the importance of continued support to address gaps in countries’ capacity to gain access to and manage climate finance (para. 61). It also calls for considering the three dimensions of sustainable development in all flows, including private resources, and to increase efforts to enhance the resilience of countries to respond to shocks and natural disasters (para. 62).

C.1 Official Development Assistance and South-South Cooperation

The 2030 Agenda for Sustainable Development includes two key targets to track progress on ODA: First, that ODA reaches 0.7 per cent of gross donors’ gross national income (GNI). Secondly, that between 0.15 and 0.20 per cent of their GNI is allocated to least developed countries (LDCs).

As shown in Figure 8, neither the region’s developed countries nor its developing country donors reached, on average, the 0.7 per cent target. The only individual country that did was

Turkey, which allocated 0.76 per cent of it's GNI to ODA in 2016 and 0.95 per cent in 2017, mostly in response to the humanitarian and refugee crisis in the Syrian Arab Republic.

The figure reveals differences between the two types of donors: while the ODA/GNI ratio for developed country donors has decreased since 2013, developing country donors have increased it significantly since 2011, surpassing developed country donors since 2015. This average, however, is strongly influenced by the strong performance of Turkey. The average ODA/GNI ratio of the Republic of Korea, Russian Federation and Thailand ranged between 0.05 and 0.10 per cent in the period included in the figure. Among these countries, the largest donor was Republic of Korea with an ODA/GNI ratio ranging between 0.11 and 0.16 per cent of the GNI.

The figure also shows the share of ODA allocated to both LDCs and other developing countries in Asia and the Pacific. Developed country donors allocated an average of 48 per cent of their total ODA to countries in the region, compared to 33 per cent for developing country donors. The latter’s ODA allocation to other countries in Asia-Pacific fluctuated much during the period considered, from more than 40 per cent in 2014-2015 to just over 20 per cent in 2016-2017.

During the period considered, developed and developing country donors allocated, respectively, 19 and 17 per cent of their total ODA to Asia-Pacific LDCs. Their allocation to non-LDC developing countries in the region was 29 and 16 per cent, respectively. In other words, developing country donors allocated close to half of their ODA in the region to LDCs, compared to over a third in the case of developed country donors.

In absolute numbers, total aid disbursements by developed donors to Asia grew by 6.4 per cent in 2017 relative to 2016, while developing donors increased their aid by 20 per cent during the same year, largely driven by Turkey, the only developing donor in Asia-Pacific that increased its aid.


These patterns confirm the importance of South-South cooperation. They also show that developed country donors from Asia-Pacific have a consistent pattern when it comes to disbursing their aid to countries in the region, while developing donors have reduced it over the last two years for which data is available.

South-South cooperation in Asia and the Pacific is influenced by the geographical proximity between donors and recipients, as illustrated by the support of Thailand to the Lao People’s Democratic Republic and the support of India to Bhutan and Nepal. In recent years, this type of cooperation has expanded to North-South-South triangular cooperation, through which Northern development partners or multilateral agencies provide technical support and funds, while southern donor countries share experiences and knowledge based on their geographical,

cultural and historical proximity to another Southern country. Recent examples of triangular cooperation include the cooperation of Japan with Thailand on disaster prevention and tourism promotion in Myanmar, and the Australia-China- Papua New Guinea trilateral project to eliminate malaria from Papua New Guinea.

A major challenge for recipients of development cooperation is the fragmentation of aid flows from many stakeholders. Having many donors and aid channels increases transaction and administrative costs, thereby reducing the impact of aid at the recipient level.

Aid fragmentation is explained by aid budgets in donor countries that are often thinly spread across different organizations – and often, each of them with different goals and regulations. Such fragmentation can be aggravated by volatility

Figure 8. Evolution of Official Development Assistance from Asia-Pacific, 2011-2017 A. From Developed Donors B. From Developing Donors

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in aid flows, which reduces the impact of aid: in addition to the increased transaction costs at the recipients’ end, thinly-spread aid budgets at the donor’s end limit the potential impact of hefty aid interventions. to reach economies of scale when reaching many beneficiaries, e.g. reducing cost of inputs such as vaccines, etc.

Policy Actions during 2017-2018Scaling-up Development CooprationMany donor countries, both developed and developing, stepped up their cooperation efforts, either by increasing financial contribution through grants and concessional loans or by providing a diverse range of technical assistance and cooperative platforms: from modest election support provided by Mongolia to Kyrgyzstan and Myanmar, to the 15,000 annual fellowships offered under the banner of the Indian Technical and Economic Cooperation.

India went beyond some of its traditional neighbouring development cooperation partners, such as Bhutan and Nepal, to include Cambodia, Lao People’s Democratic Republic, Myanmar and Viet Nam in the group of beneficiaries for the 2016-2017 fiscal year, recording a 209 per cent increase in assistance since 2014 to Myanmar in particular.

Development Aid under ThreatWhile there have been some improvements in scaling up aid, the current uncertainty about the global economic situation and the increase in trade protectionist policies make it more important than ever to advocate for the achievement of globally agreed targets for ODA – especially towards LDCs. In addition, there are threats to reduce budgets for development from a number of countries, along the withdrawal of some important countries such as the United States of America from key agreements such as the Paris Accord. Under this threat, it is vital that South-South cooperation continues moving beyond bilateral initiatives to multilateral initiatives. This move translated in the creation of new organizations such as the New Development Bank or the Asian Infrastructure Investment Bank. These new multilateral

development banks, along with China’s Belt and Road Initiative, are contributing to enhance the supply of development finance, particularly for infrastructure deficient least developed countries and landlocked developing countries, which may lead to aid fragmentation. However, developing donors must continue ensuring that traditional organizations such as the United Nations continue having the resources necessary to pursue the 2030 Agenda for Sustainable development and other international agreements such as the Paris Accord.

Aligning Cooperation Strategies with the 2030 AgendaSome partners have taken additional steps to integrate the 2030 Agenda in their development cooperation frameworks. The Multilateral Aid Strategy of the Republic of Korea explicitly mandates that the Korea International Cooperation Agency “engage actively in solving global development challenges and contribute to achieving the SDG.” The country also established the Second Mid- term Strategies for Development Cooperation 2016-2020, which provided for an integrated and inclusive approach to achieve the SDG and enhance the effectiveness of development cooperation. The latest policy priority of Japan includes “addressing global issues toward achieving SDG and promoting human security.” The Russian Federation renewed a partnership framework with the United Nations Development Programme (UNDP) to continue its support to multilateral efforts towards achieving the 2030 Agenda. The new India-United Nations Development Partnership Fund seeks to support southern-owned and led, demand-driven, and transformational sustainable development projects across the developing world with an emphasis on least developed countries and small island developing States.

Enhancing Effectiveness and EfficiencyEncouragingly, numerous donors are addressing issues of inefficiencies of development cooperation owing to the multiplicity of actors and competing priorities on the supply front, and the capacity constraints on the recipient front.


The Government of Indonesia endorsed the establishment of a dedicated agency for South- South and triangular cooperation in 2016 to enhance coordination among ministries and create synergy between projects, national priorities and public awareness. Such initiatives are indicative of the increasing prevalence of this emerging foreign policy lever and represents the potential for replication. Other major donors such as Japan and the Republic of Korea have also formulated strategies to provide more focused assistance in an effective and agile manner, while meeting recipient demands with flexibility.

Besides strategizing on the donor front, institutional changes to enhance effectiveness and efficiency within recipient countries have also been taking place. For example, Bangladesh has launched a new agency - Development Effectiveness Wing - focusing on coordination of ODA, climate finance and South-South cooperation. The country also formulated the National Policy for Development Cooperation in 2016 which touches on issues such as communication and transparency among implementing agencies.

Applying Technology to ODAA central criticism of aid in the past was that it did not reach its final intended recipients. In response to this, cash transfers to the poor were introduced – often conditional on features like keeping children at school. Progressively, conditional cash transfers have evolved towards unconditional cash transfers because donors realized that in general, the poor, and not donors or policymakers, know what is best for them. This evolution has been favored by technological improvements: today, many poor have a cell phone and can be identified biometrically (the cost to do so in India is about $4).40 This means that donors can know who they are and where they live. Hence, aid can be directly given to them (due to this, some authors have predicted the end of ‘traditional’ aid, see Giugale 2017). This offers possibilities such as ending regressive

fuel subsidies which benefit the better-off, to substitute them by direct, unconditional cash transfers. Countries such as India are already implementing such schemes, e.g. Aadhar. More are expected in the future.

Knowledge Sharing and Capacity BuildingCooperation that goes beyond monetary transfers and involves an exchange of experiences and technology is providing new avenues for engagement. This is particularly true with South-South partnerships where similarities in development challenges and contexts make the exchange more effective. The International Think Tank for Landlocked Developing Countries, established by Mongolia to facilitate research and knowledge sharing for landlocked developing countries, gained intergovernmental status in 2017. The Sustainable Community Development Project of Thailand has been initiated to share best practices and experiences in food security, climate change and public health, based on the application of its home-grown philosophy of sufficiency economy. Through the Small Grants Programme of UNDP, India is supporting “women solar engineer” projects across Africa and Asia to empower poor, illiterate women by training them to build, install, maintain and repair solar technologies. In 2016, China established the Institute of South-South Cooperation and Development which provides developing countries with opportunities for degree and short-term executive training based on the successful development experience of China and other developing countries.

New Types of AidTo better reflect how ODA can contribute to the 2030 Agenda, a new measure of ODA has been proposed by the OECD: total official support for sustainable development (TOSSD). TOSSD aims to complement ODA by increasing transparency and monitoring important new trends that are shaping the international development finance landscape,

40 Giugale 2017


including: i) the leveraging/catalytic effect of ODA, ii) the use of blended finance packages, and iii) the use of innovative risk mitigation instruments in development cooperation.41 TOSSD would incentivise broader external finance for development as a complement to developing countries’ own domestic resources.

The Way ForwardGiven the significant demand for financial resources to achieve the SDGs in the Asia-Pacific region, and in view of the limited fiscal space of several least developed economies, development assistance through ODA and South-South cooperation will continue to be a vital source of external finance. This is particularly the case for the poorest Asia-Pacific countries, which rely heavily on development assistance for financing their development projects. Countries should continue their efforts to make aid more efficient by coordinating among donors and embrace, where possible, new technologies to transfer aid directly to the poor.

C.2 Climate Finance

Over the last year, attention has focussed on the formulation of the so-called ‘Paris Rulebook’ or the set of complex rules that will enable the Paris Agreement on Climate Change to implement desired climate action. The rules cover nine broad themes including how to articulate and track national climate pledges in the Nationally Determined Contributions (NDCs) that are submitted by Parties to the Paris Agreement and how to report on finance for this climate action.

Under the Paris Agreement, developed countries have a binding obligation (Art. 9.5 and 9.7) to communicate how much climate finance has been provided and mobilised for developing countries and these will be subject to review. This is complemented by the guidance of the Rulebook to provide information on levels, instruments, channels, types and purposes of expected support.

In the future, therefore, one can expect greater harmonisation of what will count as climate finance and how it will be measured and tracked. In the interim, there are still definitional issues 42 and the current nascent state of the system for measuring, reporting and reviewing climate finance continues to complicate attempts to paint an accurate picture of overall climate finance flows.43

Notwithstanding these challenges, for the present purpose, based on available data, climate finance provided through the following international development cooperation channels is covered: (i) bilateral ODA, flowing directly from a national government to a recipient, via bilateral development finance institutions44 or national climate funds; (ii) multilateral ODA, through the multilateral development banks; and (iii) through dedicated climate funds such as the Green Climate Fund (GCF) or the Global Environment Facility (GEF).

Climate-specific finance through bilateral channels to Asia-Pacific countries reached around $17.6 billion in 2017, roughly 45 per cent of the global total.45 Multilateral development banks provided $15.7 billion of climate finance to the Asia-Pacific region in 2017, which represents 57 per cent of the total Multilateral Development Banks (MDB)

41 http://www.oecd.org/dac/financing-sustainable-development/tossd.htm42 Forexample,Article4.3oftheconventionstatesthatfinancialresourcetosupportclimateactionsshouldbe‘newandadditional’.However,thereare

no agreed-upon criteria for determining that the funds are additional.43 The Standing Committee on Finance, a constituted body under the UN Framework Convention on Climate Change prepares biennial assessments

andoverviewsofclimatefinanceflowsandworksonmethodologicalissuesrelatingtomeasurement,reporting,andverificationofclimatefinance;climate-relatedfinanceflows,andassessmentofclimatefinanceflows(http://unfccc.int/files/cooperation_and_support/financial_mechanism/standing_committee/application/pdf/call_for_evidence_2018_ba.pdf).SeealsoInter-agencyTaskForceonFinancingforDevelopment(IATF)(2016).Addis Ababa Action Agenda: Monitoring commitments and actions. Inaugural Report 2016. United Nations and Inter-Agency Task Force on Financing for Development (IATF) (2017). Financing for Development: Progress and Prospects. New York: United Nations.

44 The main bilateral DFIs include: OeEB (Austria), BIO (Belgium), BMI-SBI (Belgium), IFU (Denmark), Finnfund (Finland), AFD/Proparco (France), KfW/DEG (Germany), CDP/SIMEST (Italy), FMO (Netherlands), Norfund (Norfund), SOFID (Portugal), COFIDES (Spain), Swedfund (Sweden), SIFEM (Switzerland), CDC Group (United Kingdom), and OPIC (United States).

45 Extractedfrom‘ClimateChange:OECDDACExternalDevelopmentFinanceStatistics’,Climate-relateddevelopmentfinanceattheactivitylevel,recipientperspective,2016,(http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm).


funding for climate-related activities.46 Of this, $3.7 billion, or roughly one-quarter, was directed to adaptation activities, while $12 billion or three-quarters of the total went to mitigation.

Dedicated climate funds amounted to $1.4 billion for the region (approved in 2017-18). Of this funding, three-quarters went to the top-10 countries, India, Indonesia, Kazakhstan, Solomon Islands, Samoa, Turkey, Tajikistan, Bangladesh, Mongolia, and Sri Lanka, while the bottom ten received two per cent. Dedicated climate funds and initiatives have approved a total of $5.6 billion cumulatively for 609 projects and programmes in the region (2003-2017).47

Policy Actions during 2017-2018The main focus of policy actions during the recent period were geared to (i) enhance countries’ readiness for climate finance across the region and, in particular, the least-developed and small island developing countries through the fast-track accreditation of additional national direct access entities including banks to the GCF and the accelerated development of pipelines of bankable projects through the GCF; (ii) increasing efforts to move more funding proposals into implementation and scaling up disbursement; (iii) increase transparency and improve the monitoring, reporting and verification of climate finance through the Paris Rulebook; and (iv) improve the leverage ratios of public climate finance through blended finance instruments. There are many successful examples of this across the region and the focus must be on implementing tailored schemes to provide the appropriate incentives.48

The Way ForwardTo unlock the private finance needed, accurate and timely disclosure of climate-related risks on asset values by companies and investors is one key measure that is being promoted to support informed investment, lending, and insurance underwriting decisions and improve understanding and analysis of climate-related risks and opportunities faced by the private sector. This is based on the recommendations by the Financial Stability Board’s Task-Force on Climate-Related Financial Disclosures that will ensure that financial markets are able to price this risk to support informed, efficient capital-allocation decisions. In the Asia-Pacific region, there is still limited awareness of these risks to private sector investors, lenders, and insurance underwriters. More organisations across the region should adopt the Task Force’s recommendations.

Second, countries must continue to refine and harmonise green taxonomies and sustainability standards to define what is green and act as a compass for sustainable finance. Green taxonomies will underpin the development of green bond standards, green labelling for other financial products and sustainability standards. This will create greater certainty for investors about what is sustainable, which will contribute to greater investment in a low-carbon, climate-resilient economy.

Third, there continues to be growing interest in blended finance solutions to mobilise private finance for climate-resilient, low-carbon pathways. In least developed countries, the

46 Multilateral development banks (MDBs) included in this analysis are the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the Inter-American Development Bank Group (IDBG) and the World Bank Group (WBG). The Joint Report on Multilateral Development Banks’ Climate Finance can be found at www.ebrd.com/2016-joint-report-on-mdbs-climate-finance.pdf.

47 Climate Funds Update (2017), Data dashboard, available at https://climatefundsupdate.org/. The data is based on approved funding through the Adaptation Fund, Adaptation for Smallholder Agriculture Program, Amazon Fund (Fundo Amazônia), Biocarbon Fund, Clean Technology Fund, Forest Carbon Partnership Facility, Forest Investment Program, GEF Trust Fund – Climate Change focal area, Global Climate Change Alliance, Global EnergyEfficiencyandRenewableEnergyFund,GreenClimateFund,IndonesiaClimateChangeTrustFund,LeastDevelopedCountriesFund,MDGAchievement Fund – Environment and Climate Change thematic window, Partnership for Market Readiness, Pilot Program for Climate Resilience, Scaling-Up Renewable Energy Program for Low Income Countries Special Climate Change Fund, Strategic Climate Fund, Strategic Priority on Adaptation, and UN-REDD Programme.

48 See,BetterBusiness,BetterWorldReport.Availablefromhttp://businesscommission.org/our-work/blended-finance-taskforce-for-the-global-goals.


barriers to attracting private capital are more onerous than elsewhere due to higher actual or perceived risks, a lack of bankable pipeline and weak policy or regulatory regimes. An emphasis should be on tailored support to LDCs, as well as on financial innovation and creating the economic and financial incentives and regulatory tools that can help draw investments into these nascent green markets.

Fourth, countries should improve their readiness and gear up for financial instruments with major potential to deliver private finance for climate-resilient, low-emissions solutions, especially green bonds and green lending. The public sector will be central to enabling and scaling up green bond issuance and investment through capital raising plans for NDC funding. Green bond standards and green finance guidelines, enhanced capacity-building at the country-level and blended solutions for de-risking and credit enhancement can help to propel this market forward at the regional level.

Finally, now that the Paris Rulebook has been defined, countries need to work on understanding and implementing it, including the robust system for measuring, reporting and reviewing climate finance information, spanning both public and private finance.

D. International Trade as an Enginge for Development

The Addis Ababa Action Agenda fully recognizes the role of international trade as an engine of development and poverty reduction, and it promotes a universal, rule-based open, transparent, predictable, inclusive, non-discriminatory and equitable multilateral trading system under the WTO, as well as meaningful trade liberalization (United Nations, 2015a, para. 79). The Agenda also aims at doubling the share of least developed countries in global exports by 2020, as stated in the Istanbul Programme of Action (para. 82).

For that purpose, the Agenda supports the least developed economies’ engagement in trade and economic agreements and their integration in regional and world markets (para. 82), including through the Aid for Trade initiative, which seeks to mobilize resources from donor countries to address their trade-related constraints (para. 90). The Agenda also commits to strengthening the coherence and consistency among bilateral and regional trade and investment agreements, and to ensure that they are compatible with WTO rules (para. 87).

D.1 Multilateral and Regional Trade Policies

Most Asia-Pacific countries have significantly liberalised their international trade over the past two decades. Applied tariffs have decreased substantially, driven by multilateral commitments, unilateral actions and a growing number of bilateral and regional preferential trade agreements. Tariffs have decreased on average, although the share of tariff peaks is still at 3 per cent of all tariff lines across Asia-Pacific economies.49

Moreover, the number of non-tariff measures (NTM), such as technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS), have decreased since 2016 after reaching a peak in 2015 (Figure 9). In 2017, the share of global TBTs and SPS initiated by countries in Asia and the Pacific were 22 and 28 per cent respectively.. However, the region’s contribution to those measures decreased to 20.5 per cent and 26 per cent, respectively, during the first ten months of 2018 because of the growing protectionism in developed economies outside the region (ESCAP, 2018). In fact, the potential for a global relapse into protectionism is high, as the increased anti-globalization sentiment in developed economies have led to trade tensions and a deterioration of the global trade and investment environment.

49 Tariffpeaksaredefinedasrelativelyhightariffs,usuallyon“sensitive”products,amidstgenerallylowtarifflevels.Forindustrializedcountries,tariffsof15percentandabovearegenerallyrecognizedas“tariffpeaks”.SeeWTOGlossary.Availablefromwww.wto.org/english/thewto_e/glossary_e/tariff_peaks_e.htm.


Figure 9. Effectively Applied Tariffs and non-Tariff Measures in Asia and the Pacific

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With regards to trade facilitation and paperless trade, an ESCAP-led global survey conducted in 2017 (ESCAP, 2017g) showed that countries in Asia and the Pacific have made progress in implementing the WTO Trade Facilitation Agreement, which entered into force in February 2017. However, implementation of trade facilitation and paperless trade measures remains very heterogeneous. For example, Australia, China, Japan, Republic of Korea and Singapore achieved implementation rates of more than 80 per cent, while implementation in some other countries, especially least developed countries, remained low (Figure 10). While the average implementation rate for all Asia-Pacific countries was 50.4 per cent, for the region’s least developed countries it was 34.4 per cent.

Figure 10. Overall Implementation of Trade Facilitation Measures in 44 Asia-Pacific Countries, 2017

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To accelerate the digitalization of trade procedures and cross-border exchanges of electronic trade data and documents, the members of ESCAP adopted the "Framework Agreement on Facilitation of Cross-Border Paperless Trade in Asia and the Pacific" (E/ESCAP/RES/72/4) in May 2016. As mentioned in Section A.2 of this report, as of 2018 the agreement was signed by six countries and is pending ratification and accession by other ESCAP members before entry into force.

Policy Actions during 2017-2018The Asia-Pacific region continues to be a major contributor to the worldwide increase of preferential trade agreements. As of October 2018, there were 283 trade agreements in force, signed or under negotiations, which had at least one member from the Asia-Pacific region. Of those agreements, 194 are already in force or have been signed, but 47 of these have yet to be ratified by the WTO under the Transparency Mechanism for RTAs. (ESCAP, 2018).


50 SeeforfurtherdetailsonthetextoftheComprehensiveandProgressiveAgreementforTrans-PacificPartnership(CPTPP)athttps://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/cptpp/.

During 2017-2018, Asia and the Pacific signed 18 new free trade agreements (FTAs), including a large plurilateral agreement: the CPTPP.50 This agreement is a cross-regional trade agreement covering 11 economies (seven of which are in Asia and the Pacific) that represent around 16 per cent of the world’s GDP and 7 per cent of the world’s population. Another plurilateral agreement signed during this period is Pacific Agreement on Closer Economic Relations Plus.

In addition, several bilateral agreements have been signed with economic blocs and individual economies during the same period. Japan and Singapore signed bilateral FTAs with the European Union in 2018. ASEAN signed a bilateral FTA with Hong Kong, China, while the Republic of Korea signed bilateral FTAs with all five members of the Central American Free Trade Area (CAFTA). Eight bilateral FTAs signed during the same period include Australia-Peru, China-Georgia, China-Maldives, China-EAEU, Islamic Republic of Iran-EAEU, Hong Kong, China-Macao, China, Indonesia-Chile and Singapore-Sri Lanka.

The Regional Comprehensive Economic Partnership (RCEP), representing 30 per cent of world GDP and 45 per cent of the world population, has also gathered pace with its signature expected in 2019. The successful conclusion of RCEP would be an important step toward greater regional integration especially for Lao People's Democratic Republic.

However, none of the newly sighed FTAs during 2017-2018 involved least developed countries. The fact that most least developed countries have limited participation in FTAs with their major trading partners imply that maintaining its comparative advantage in international trade after graduation may be challenging.

The Way ForwardGoing forward, with falling tariffs, NTMs would play a crucial role in shaping global trade patterns and their sustainability. NTMs often comprise policies that stem from non¬trade objectives in an effort to protect against health or environmental risks.

However, even legitimate NTMs with non¬trade objectives can significantly restrict and distort international trade flows. Furthermore, every NTM comes with its own implementation procedures, which raises costs and creates delays.

Countries would need to carefully review their non-tariff measures to ensure that they do not unnecessarily restrict trade. While non-tariff measures are often put in place for legitimate reasons – such as the protection of human or animal health or safety – and may be a useful tool in reaching social and environmental goals of the 2030 Agenda for Sustainable Development, they should be implemented in the most efficient way possible. This may include putting in place mutual recognition arrangements of conformance procedures and systematic reliance on international standards. The WTO Trade Facilitation Agreement has the potential to drastically reduce procedural obstacles and delays at the border. Moving from paper-based processes to paperless trade procedures would also be important in this context. ESCAP members at all levels of development are encouraged to participate in the Framework Agreement on Cross-Border Paperless Trade in Asia and the Pacific to build their capacity in this area, which will lead to the development of regional solutions towards seamless exchanges of electronic trade data and documents.

On the other hand, the number of preferential trade agreements in Asia-Pacific continues to increase and has led to a complex situation with numerous overlapping agreements, often described as the “noodle bowl”. The proliferation of overlapping trade agreements within Asia and the Pacific is a source of concern for many countries in the region, implying higher search costs for the best routes of supply/purchase and limiting the benefits of these preferential deals, especially for SMEs.

To partly overcome the “noodle bowl” phenomenon and facilitate traders to carry on their business in a more efficient way, ESCAP members may consider consolidating bilateral FTAs into a


regional bloc and abolishing bilateral preferential trade agreements once a larger preferential trade agreement with more countries is signed. Such actions have been taken in the past in the process of consolidation of the European Union. Recent mega-regional initiatives such as RCEP and CPTPP are aimed at boosting trade and facilitating regional integration in the Asia-Pacific region. They actually offer a framework to integrate the region’s different FTAs. This is a step in the right direction towards the consolidation of the preferential trade agreements, which ESCAP has long been recommending.51 However, the exclusion of the smallest and most vulnerable countries and the neglect of sensitive issues make it clear that regional and mega-regional agreements, although important, are not a substitute for the multilateral system.

D.2 Enabling Least Developed Countries’ Participation in Trade

The Istanbul Programme of Action (IPoA), adopted at the Fourth United Nations Conference on the Least Developed Countries in 2011, stated the goal of doubling the share of merchandise exports of the least developed countries in world exports by 2020. In 2017, the share of the aggregate exports of the world’s 47 LDCs in world exports was only 1.37 per cent, a very small 0.09 percentage points increase from the baseline level of 1.28 per cent in 2011. Moreover, the export share has decreased since 2015 (Figure 11). Given this global trend, it is uncertain whether or not LDCs will achieve the IPoA target. Signs of global and regional economic slowdown, partly because of adverse impacts of the current trade war between China and the United States, provide an additional cause for concern that the target is not going to be achieved by 2020.

To significantly enhance their share in global exports, the LDCs need to enhance their productive capacities to facilitate market and product diversification. Aid for Trade initiatives can help towards this goal. Figure 12 depicts the share of Aid for Trade as a percentage of GDP for the 12 Asia- Pacific LDCs in 2017.

Since 2007, the year the initiative was first put into practice, almost $300 billion has been disbursed. Of this amount, about 41.5 per cent has been targeted at Asia-Pacific economies, demonstrating the importance of the aid for trade initiative for LDCs in the region (ADB, 2017a). In 2017 the largest recipients of trade-related official development assistance (ODA) among LDCs the least developed countries in the Asia and the Pacific region were Afghanistan (about $1 billion) and Bangladesh (about $3 billion). The five least developed countries in the Pacific – Kiribati, Solomon Islands, Tuvalu and Vanuatu – and Afghanistan received the most in terms of shares of GDP in 2017, from about 5 per cent for Vanuatu and Afghanistan, to 9 percent in Solomon Islands, 21 percent in Kiribati, and 54 percent in Tuvalu. The latter three countries also experienced the largest increases between 2007-2016 and 2017, while Afghanistan experienced the largest decrease. For the other seven least developed countries in the region, the share of trade-related ODA was lower in 2017, ranging between 0.8 percent of the GDP for Lao People's Democratic Republic to 3.1 percent for Nepal.

Policy Actions during 2017-2018As has been reported in the past, all developed and many developing countries in the region have granted either full or nearly full multilateral non-reciprocal preferences to least developed countries under the so-called duty-free, quota-free market access schemes. For instance, the duty-free, quota-free market access schemes offered by Australia and New Zealand cover 100 per cent of tariff lines, while Japan’s offers duty-free quota-free access to LDCs in 97.8 per cent of its tariff lines. Currently, nine developing countries in the region provide Duty-free Quota-free market access for least developed countries, with coverage ranging between 99.9 per cent of tariff lines in Kyrgyzstan to 3.7 per cent of tariff lines in Tajikistan.

51 SeevariousissuesoftheAsia-PacificTradeandInvestmentReportathttp://www.unescap.org/publication-series/asia-pacific-trade-and-investment-report.


Figure 11. Least Developed Countries’ Share of World Merchandise Exports

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Figure 12. Aid for Trade to Least Developed Countries in Asia-Pacific, 2017 and 2002-2016

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Source: ESCAP based on OECD data on trade-related ODA commitments (https://stats.oecd.org/qwids) and World Bank data on GDP at market prices (https://data.worldbank.org/indicator/NY.GDP.MKTP.CD). Accessed February 2019.Notes: Trade-related ODA includes (i) technical assistance to help countries develop trade strategies, negotiate more effectively, and implement outcomes; (ii) infrastructure such as roads, ports, and telecommunications that link domestic and global markets; (iii) supporting the development of productive capacity though investments in industries and sectors that allow countries to diversify exports and build on their comparative advantage; and (iv) adjustment assistance, to cover part of the costs associated with tariff reductions, preference erosion, or declining terms of trade. Trade-related ODA committed to Tuvalu, not included in the figure, represented 54 per cent of GDP in 2017 and 35 per cent of GDP, on average, during 2007-2016


However, exporters in LDCs have not, in general, taken full advantage of preferential market access granted to them. In developed markets, about 5 to 15 per cent of imports from LDCs were eligible for preferential tariff treatment but entered as MFN dutiable. Possible reasons why the LDCs have not fully benefited from duty-free, quota-free market access include exclusions of their export products from preferential trade arrangements and that their exporters have been unable to meet the requirements, in particular preferential rules of origin.

Based on the Nairobi Decision on preferential rules of origin for LDCs, progress has been made in simplifying such rules. China, for example, introduced new features including bilateral and regional cumulation to improve the administration of the origin of imported goods, which makes it easier for LDCs to export.

Regarding market access in services, on 17 December 2011, the Geneva WTO Ministerial Conference allowed WTO members to grant preferential treatment to services and service suppliers from LDCs members. Preferential treatment related to market access can be implemented once a notification has been submitted to the Council for Trade in Services. Since the last report, the number of notifications remains the same at 24. Out of 24 WTO members submitting notifications of their preferential treatment to services and services suppliers of LDCs under the LDC Service Waiver, ten countries are in the region: Australia; China; Hong Kong, China; India; Japan; Republic of Korea; New Zealand; Singapore; Thailand and Turkey.

An important amendment to the “Agreement on Trade-Related Aspects of Intellectual Property Rights” (TRIPS Agreement) entered into force in January 2017.41 WTO Members took the decision to amend the TRIPS Agreement specifically to adapt the rules of the global trading system to the public health needs of people in poor countries. This action follows repeated calls from the multilateral system for acceptance of the amendment. Most WTO member countries in the Asia-Pacific region accepted the amendment

to the TRIPS Agreement of the WTO. As of 2018, the exceptions are only Afghanistan, Armenia, Kazakhstan, Timor-Leste, Solomon Islands, and Vanuatu. In addition, in February 2018, LDCs collectively submitted a request for a better implementation of paragraph 2 of Article 66 of the TRIPS Agreement on promoting and encouraging technology transfer to LDCs.

The Way ForwardIf the region is expected to meet the Istanbul Programme of Action’s target of doubling the share of LDCs in global merchandise exports. by 2020, and to continue increasing their exports post-2020, governments of the region’s LDCs need to continue making efforts to enhance their capacities and diversify their exports. Expanding preferential market access to goods and services from LDCs and supporting LDCs to engage in global value chains are particularly important to bring about additional opportunities for them to diversify their exports. Finally, the entry into force of the TRIPS Agreement amendment, providing legal certainty that generic medicines can be imported at reasonable prices by countries with limited or no pharmaceutical production capacity, is very important for LDCs to treat diseases such as HIV/AIDS, tuberculosis or malaria and to promote technology transfer.

E. Debt and Debt SustainabilityThe Addis Ababa Action Agenda notes that borrowing is an important tool for financing sustainable development, but it needs to be managed prudently (United Nations, 2015a, para. 93). For that purpose, the Agenda recognizes the need to assist developing countries in attaining long-term debt sustainability through coordinated policies for debt financing, debt relief, debt restructuring and sound debt management (para. 94). The Agenda also encourages international institutions to continue to assist debtor countries to enhance debt management capacity, manage risks, and analyse trade-offs between different sources of financing, as well as to help cushion against external shocks and ensure steady and stable access to public financing (para. 95).


A common approach to measuring fiscal space and debt sustainability is through the “fiscal gap”, defined as the difference between the current fiscal balance and the constant balance that stabilizes debt over a medium-term horizon at a sustainable level. Under this definition, the sustainability of government debt depends not only on the primary balance but also on the differential between economic growth and borrowing costs. Estimations of the fiscal gap suggest that the debt ratios of most countries in the Asia-Pacific region would stabilize in the coming years, provided that economic growth and interest rates remain at their current levels.Recent estimates by the International Monetary Fund (IMF) seem to confirm that many Asia-Pacific economies can afford a higher public debt level to increase development spending. In 24 developing Asia-Pacific economies, the average debt level is projected to remain moderate at below 46 per cent of GDP from 2018 to 2023 (IMF, 2018, WEO). Public debt levels in the region remain relatively low compared to the developed world (Figure 13a). Fiscal positions are also expected to improve, on average between 2013 and 2018 (Figure 13b). In addition, public debt sustainability analyses carried out by the IMF and the World Bank indicate that the risk of public debt distress is generally low, with 22 out of 41 economies in the region considered to have a low-risk level. In these economies, public debt levels are projected to remain sustainable under adverse macroeconomic shocks, such as slower output growth, higher interest rates, and the weaker exchange rates.

However, the IMF/World Bank sustainability analysis also indicates that 8 of out the 41 Asia- Pacific economies are considered as having a high risk of public debt distress, most of which are LDCs, such as Afghanistan and Lao People’s Democratic Republic, as well as small island developing States, such as Maldives and Samoa. Moreover, a recent ESCAP study (ESCAP, 2017d) estimated that countries such as Armenia, Kyrgyzstan, Lao People’s Democratic Republic, Maldives, and Viet Nam would experience an increase in their public debt-to-GDP ratios in the event of an adverse shock to their economic growth-interest rate differential.

The IMF debt projections shown on the previous page do not consider contingent liabilities of the public sector, which could lead to significant increases in the debt-to-GDP ratio in some countries. Contingent liabilities are defined as obligations that do not arise unless particular discrete events occur in the future. As such, they differ from direct liabilities where the settlement date is fixed at the time when the nominal obligation is set (Towe, 1991). Contingent liabilities can be explicit, such as bank deposit insurance and state guarantee on private investment, or implicit, such as default of subnational public entities and banking sector failure. Natural disasters, which can lead to large, unexpected fiscal outlays, are also considered contingent liabilities. The Pacific small island developing States and several economies in South and South-West Asia and South-East Asia are highly prone to natural disasters (Kopits, Ferrarini and Ramayandi, 2016). The fiscal cost of capital injection to bail out troubled state-owned enterprises, if materialized, could be high in countries such as China, India and Tajikistan. In China, Moody’s (2017) estimates that liabilities of state-owned enterprises stood at 114 per cent of GDP at the end of 2015, of which liabilities worth around 20-25 per cent of GDP may require restructuring over time. Other estimates suggest that the Chinese Government may have to spend up to 5.5 per cent of GDP by 2021 to bailout state-owned enterprises in case of default (Ferrarini and Hinojales, 2018). Finally, contingent liabilities relating to a banking sector turmoil are also estimated to be significant in some countries, ranging from 1.9 per cent of the GDP in India to 3.9 per cent of the GDP in China (Arslanalp and Liao, 2013).

Policy Actions during 2017-2018Between 2017-2018 several countries in the region implemented measures to make their debt more sustainable. This sections briefly reviews policy actions in three areas:


Figure 13. Public Debt Estimates, 2018-2023A. Asia and the Pacific Compared to the World’s Developed Countries

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B. Public Debt Levels (as Share of GDP) of Asia Pacific Countries in 2018 and 2023

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Making Public Spending Financed by Debt more Conducive to Economic GrowthGiven that debt sustainability depends not only on the debt itself but also on economic growth as well, it is critical to ensure that public spending has a positive impact on economic growth. This can happen, for instance, through public investments in infrastructure such as electricity, roads and ports, which can “crowd in” private investment. Examples of countries where this happened include Thailand, India, the Philippines and China.

Thailand is pursuing an ambitious public infrastructure development plan, centered on the Eastern Economic Corridor, a new special economic zone geared toward advanced technology such as aviation and automation which is worth up to $45 billion, equivalent to 10 per cent of total GDP. Projects range from airports and deep-sea ports to high-speed railways and roads. India, in its 2018/2019 budget, showed a continuing trend in ramping up infrastructure spending, with ambitious plans in all areas of transport infrastructure as well the creation of smart cities and WIFI provision to rural areas. In the Philippines, the Government increased infrastructure spending by 50 per cent in 2018, particularly on building and maintenance of transport, health and education facilities. In China, infrastructure investments have been ramped up in late 2018 in response to growth risks from trade tensions. An alternative to infrastructure actively pursued by China has been to expand the supply side by promoting research and development, innovation and robotics. In this regard, China has bought more industrial robots each year than any other country since 2013, including high-tech giants such as Germany, Japan and Republic of Korea.

Mixed Fiscal Policy StancesIn Asia and the Pacific, the fiscal stance in 2018 was mixed. Some countries engaged in accommodative fiscal policy to support economic growth. Other countries tightened their fiscal stances due to concerns of macroeconomic

stability. Over half of the countries with available data eased fiscal stances. For example, as mentioned above, Thailand and the Philippines expanded infrastructure investment. The Republic of Korea increased government spending on social welfare and job creation. India introduced fiscal stimulus to benefit country side farmers and small businesses. China and Indonesia cut tax rates, with the former targeting domestic firms and households and the latter aiming to attract foreign investment. On the other hand, Malaysia and the Lao People's Democratic Republic undertook fiscal consolidation to address debt issues, and the Russian Federation strengthened fiscal rules to increase international reserves.

Issuing more Government BondsAs outlined above, due to low fiscal deficits in many countries, there is considerable scope for greater government lending to finance productive investments in support of sustainable development. One such possible source of borrowing is through the issuance of government bonds. Issuance of public bonds is not very common in developing Asia-Pacific economies. Of 47 countries with available data during the period 1995-2016, 20 countries have never issued any government bonds, 11 countries have issued public domestic bonds only and 16 countries have issued both public domestic and foreign bonds. Even among the countries that have previously issued public bonds, the quantity of bond issuances was generally modest. The average annual amount of domestic public bond issuance across 24 developing Asia-Pacific economies stood at about 2.6 per cent of GDP during the period 1995-2016. For foreign bonds, the figure was even lower at 0.6 per cent of GDP. China and India are the top issuers of public domestic bonds in term of number, which stood at close to 60 bonds a year. In terms of value, the top issuers are Sri Lanka and Turkey, where public domestic bond issuances were equivalent to 9-10 per cent of their respective GDP per year. Both the number and value of public foreign bond issuances are typically lower.


The Way ForwardAlthough public debt levels in Asia and the Pacific have increased in recent years, debt sustainability is not a major concern because of the region’s steady economic growth. Therefore, policymakers have room for more proactive fiscal policies, which should focus on enhancing the provision of public goods and services that contribute to increasing productivity and to providing an investment climate where the private sector can thrive. Policymakers should, however, continue using prudent countercyclical fiscal policy and explore other financing options, including a greater use of government bond issuance.

F. Addressing Systemic IssuesThe Addis Ababa Action Agenda commits to improve and enhance global economic governance and to achieve a stronger, more coherent and more inclusive and representative international architecture for sustainable development (United Nations, 2015a, para. 103). The Agenda emphasizes the need for sound regulation of financial markets to strengthen financial and economic stability (para. 104). The Agenda commits to preventing and reducing the risk and impact of financial crises, pursuing sound macroeconomic policies that contribute to global stability, adopting macroprudential and capital management measures as appropriate when dealing with risks from large and volatile capital flows (para. 105). The Agenda also recommits to broadening and strengthening the voice and participation of developing countries in international economic decision-making and norm-setting and global economic governance (para. 106).

Benefiting from the lessons learned during the 1997- 1998 Asian economic crisis, many emerging market economies in the Asia -Pacific region strengthened their economic and financial systems and withstood well the initial impacts of the 2007-2008 global financial and economic crisis. However, in more recent years, new systemic risks have started to emerge due to tightening of global financial conditions as a result

of the monetary policy normalization in the United States and the European Union. This is lowering interest rates differentials with the region, which has implications in terms of potential capital outflow from the region. Similarly, there is a shift in risk sentiment associated with rising trade tensions between China and the United States. Both developments have increased the risk of capital outflows and spillover of financial crises in a number of emerging markets in the region.

In fact, many countries in the region witnessed an increase in financial vulnerability in 2018. Foreign exchange reserves to cover short-term external liabilities fell in many countries. Net portfolio investment inflows also declined in the first three quarters of 2018, compared with the same time in 2017, although they remained positive. The reduction in financial inflows has led to concerns about macroeconomic stability stemming from significant levels of household and corporate debt in some countries. High and rising household and corporate debt in some large economies in the region calls for policy makers’ attention (Figure 14). The private sector in emerging markets, encouraged by low global interest rates, borrowed heavily after the global financial crisis of 2008. Large and rising household debt is a growing concern in Malaysia, the Republic of Korea, and Thailand, as is fast-expanding corporate debt in China.

Financial fragility in several developing countries in the region has also exacerbated due to rise in dollar-denominated debt, especially after the global financial crisis of 2008. The United States dollar-denominated debt of non-bank borrowers as a share of GDP in Indonesia, the Russian Federation and Turkey doubled between 2011 and 2018. Given the countries’ high exposure to refinancing and currency mismatch risks, a further strengthening of the United States dollar and additional interest rate hikes in global markets could increase the burden to service debt and financial vulnerability (UNDESA, 2019, World Economic and Social Prospects).


Elevated levels of private debt have adverse implications for financial stability and may eventually harm economic growth. Debt expansion can boost economic growth in the short term as firms and households take on more debt to consume or invest. However, such positive effects on GDP are short-lived (IMF, 2017a, Global Financial Stability Report 2017). Eventually, highly indebted firms and households may need to cut back on spending to repay their loans. Moreover, excessive leverage can inflate asset prices. For example, in the Republic of Korea, rising household debt is highly skewed towards mortgage loans, which have led to property price appreciation (Kim, Son and Yie, 2017). However, if there is an abrupt correction of housing prices, firms and households will need to further cut back on investment and consumption to repair their damaged balance sheets while banks and other financial institutions will suffer a surge of non-performing loans (NPLs) and thus lend less, hurting investment and consumption (Park, Shin and Tian, 2018). NPLs in most countries with higher private debt risks in the region have remained at relatively low levels. However, NPLs in India have surged quickly due to defaults on corporate bonds and syndicated loans (ESCAP, 2018a, Economic and Social Survey 2018).

For countries more exposed to capital flow volatility, the economy can be cushioned from negative impacts on exchange rates by developing early warning indicators to determine which capital flows matter most to exchange rates. 52

In addition, macroprudential tools targeting the demand for credit, known as borrower-based measures, are successful in containing real credit growth, whereas tools affecting the supply of credit, or financial-institutions-based measures, are effective in reducing the sensitivity of credit growth to cross-border capital flows (Fendoğlu, 2017). Developing Asia-Pacific countries have been at the forefront of macroprudential policies. Since the early 2000s, countries have adopted various tools to cope with different potential threats to financial stability. For example, Hong Kong, China and Singapore have predominantly

relied on housing related loan-to-value (LTV) restrictions. The Republic of Korea, in addition to housing measures, imposed a levy on bank non-deposit foreign currency liabilities and a ceiling on banking foreign-exchange derivative positions. China and India have been heavy users of reserve requirements.

Policy Actions during 2017-2018A number of countries in the region have introduced measures to curb excessive credit growth, increase asset quality and tighten mortgage rules in lending. For example, China has continued strong measures over the past two years to curb excessive credit growth, especially non-bank credit, to the property sector in order to reduce debt held by state-owned enterprises. In July 2018, Singapore raised Additional Buyer's Stamp Duty (ABSD) rates and tightened LTV limits on residential property purchases.

Hong Kong China imposed a tax on vacant properties in June 2018. The Republic of Korea imposed measures in September 2018 to rein in the property market by imposing heavier taxes for owners of high-value houses and multiple homes. Thailand tightened its lending criteria for housing loans in 2018, aiming to rein in household debt, with a surcharge on purchases of second properties above a certain value. In India, tighter regulations from the central bank in 2018 and a new bankruptcy law which resolves NPLs at a faster pace has prompted lenders to step up their NPL recognition, and thus begin to clean up their balance sheets by setting aside money for losses on their stressed assets.

In the case of fintech, countries have started examining closely and regulating it. One approach has been to restrict the activities of large and difficult-to-monitor companies. As Chinese regulators grew increasingly concerned about the amount of transactions that e-payment platforms manage on a daily basis, the central bank in 2018 raised the reserve fund requirements on payment platforms up to 50 per cent from

52 Gyntelbergandothers(2018),forexample,showthatstockmarket-relatedorderflowhelpsexplainobservedexchangeratevolatility.


the earlier 20 per cent. Another approach has been to streamline the operations of multiple players to make them more efficient. Cambodia’s central bank in 2017 issued new regulations to govern payment service providers, which required all firms offering the service to accept electronic payments and have at least $2 million in registered capital, to increase the stability of the sector and encourage the consolidation of smaller players. Indonesia issued a new payment gateway regulation in 2017 with the goal of a providing efficient and secure payment system for banking customers.

A third approach has been to take measures to guard against consumer fraud. The central bank of Singapore issued guidelines in September 2018 to protect people using electronic payments from fraud, errors and security threats. The Payment System Act established in Thailand in October 2017, empowered the Ministry of Finance and the central bank to regulate and supervise payment systems for, among others, customer protection, risk management, and financial stability.

The Way ForwardThe current macroeconomic context should be closely monitored by policymakers. Given increasing financial vulnerabilities associated with growing levels of corporate and household debt in some Asia-Pacific countries. Macroprudential measures should be stepped up, especially in areas where regulation is weak or non-existent. This may require a complex exercise of tailoring regulation to countries’ specific circumstances.

G. Science, Technology, Innovation and Capacity-Building

In a major expansion and advance of the Monterrey Consensus of 2002, the Addis Ababa Action Agenda introduced a chapter on science, technology and innovation (STI) as well as capacity building. The Agenda stresses the importance of public policies and finance to spur innovation and calls on countries to consider setting up diversified innovation funds (United Nations, 2015a, para. 116 and 118). It puts capacity building at the core of the Agenda,

Figure 14. Private non-Financial Sector Debt as Percentage of GDP, 2010-2018

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including in such areas as public finance and administration, social and gender responsive budgeting, mortgage finance, financial regulation and supervision, agriculture productivity, fisheries, debt management, climate services, including planning and management for both adaptation and mitigation purposes, and water and sanitation related activities and programmes (para. 115).

Asia and the Pacific is home to both some of the most innovative and technologically advanced economies and some of the most technologically deprived. As shown in Figure 15, GDP expenditures in research and development as percentage of GDP, an important gauge of STI, differs markedly across countries. Of the 16 countries for which data is available for 2015 to 2017, only four countries in the region – China, Japan, Republic of Korea and Singapore – spent 2 per cent or more of GDP in research and development. On the other end of the spectrum landlocked developing nations such as Tajikistan, Kazakhstan, Kyrgyzstan and developing countries such India and Thailand spent less than 1 per cent of GDP on such activities.

Figure 15: Research and Development Expenses as Percentage of GDP in Selected Asia-Pacific Countries in 2017 or Earlier

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Georgia

Thailand

Australia

Singapore

Republic of KoreaJapan

China

Malaysia

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Source: ESCAP, based on data from UNESCO (2018). Institute for Statistics Data Center. Available from http://data.uis.unesco.org/index.aspx?queryid=74 Accessed on 22 February 2019

Figure 16: Fixed Broadband Subscriptions in ESCAP Member Countries, 2017

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Source: ESCAP based on data from ITU’s World Telecommunications/ICT Indicators Database 2018. Accessed 20 July 2018.

The development of STI requires infrastructure, particularly information and communication technology (ICT). However, the availability of this critical infrastructure across the region is very uneven. Figure 16 shows that broadband subscriptions in advanced economies such as Australia; Hong Kong, China; Japan; New Zealand and the Republic of Korea exceeds 30 per cent of the population, compared to an average of just 2.6 per cent for the region’s least


developed countries and less than 2 per cent in Afghanistan, Cambodia, Fiji, India, Kiribati, Lao People's Democratic Republic, Myanmar, Pakistan, Samoa, Solomon Islands and Timor-Leste.

With regards to the financing of STI, most research and development take place in the private sector and are funded from internal sources. Although some of these activities can have a positive impact on sustainable development, their main objective is profit. Governments can also undertake research, development and innovation activities or fund such activities both through direct mechanisms such as research grants or government procurement and through indirect mechanisms such as tax incentives. Fiscal incentives are a popular policy tool to incentivize research and development because they give firms more choice over the projects and types of research and development on which they can work, as opposed to direct funding, which is typically intended for specific projects.

In contrast to research and development, funding for other kinds of STI projects, whether private or public, often comes from external sources, such as governments, donors, philanthropists and venture capitalists. These funders have a critical role to play in advancing STI, both in dealing with market failures and acting as market makers and in ensuring an integrated approach to STI investment for sustainable development. For the latter, they can set criteria and incentives for investments that create not only economic but also environmental and social values.

Policy Actions during 2017-2018Frontier technology, especially artificial intelligence, is receiving more and more attention in the region. Several countries in the region are in a leading group of countries investing in frontier technologies. In 2017, China published a comprehensive artificial intelligence development policy with a goal to make the country “the front- runner and global innovation centre in artificial

intelligence” by 2030.53 Under the overarching framework of “indigenous innovation”, China is stepping up financial support for major projects of its “Made in China 2025” strategy.54

Republic of Korea ranked first globally in robot density in manufacturing (UNCTAD, 2017, p. 49). The Ministry of Science, ICT and Future Planning of the Republic of Korea has laid out the “Artificial Intelligence Information Industry Development Strategy”, which aims to strengthen the foundation for artificial intelligence growth. In 2016, the government also published their “Intelligence Information Society 4th Industrial Revolution Medium- to Long-term Comprehensive Response Plan”.55

Japan’s Artificial Intelligence Technology Strategy Council was launched by Prime Minister Abe in April 2016. The Council subsequently developed the Artificial Intelligence Technology Strategy, which was published in 2017. The strategy outlines some of the priority areas for Japan in the areas of artificial intelligence research and development, and promotes collaboration between relevant government agencies, industry and academia to further artificial intelligence research.56

In Singapore, government is taking a proactive stance to prepare its citizens for the impacts brought by technology. It offers adults personal accounts which they can use to buy training, and tax incentives to encourage firms to invest more in their lower paid workers.

With regards to the use of fiscal incentives for research and development, Malaysia introduced a 200 per cent deduction (or double deduction) to strengthen national capability in research and development and innovation by encouraging companies to carry out research and development activities (Ernst & Young, 2017). More recently, three South East Asian countries have implemented additional policies to support the development of research and development (R&D).

53 Seewww.gov.cn/zhengce/content/2017-07/20/content_5211996.htm(inChinese).54 http://english.gov.cn/2016special/madeinchina2025/.55 Ministry of Science and ICT (2017). Newsletter No.25. Available from: http://english.msip.go.kr/english/msipContents/contentsView.

do?cateId=msse44&artId=1325782.56 TheJapan’sArtificialIntelligenceTechnologyStrategyisavailablefromwww.nedo.go.jp/content/100865202.pdf.


Through Viet Nam’s Decree 13 (N0. 13/2019/ND-CP), which will come into effect on March 20th, 2019, the Government will provide corporate tax deductions and exemptions to private companies which derive a minimum of 30 per cent of their turnover from scientific and technological projects. In addition, loans for projects funded by the National Technological Innovation Fund and the Science and Technology Development Fund are eligible to receive preferential and reduced interest rates of up to 50 per cent to finance their ventures. Loans will be made available by commercial lenders using a government guarantee.

Indonesia and the Philippines will be finalizing proposals in 2019 for the establishment of new policies and dedicated R&D funds. Under current proposals, government grants, subsidies, fiscal incentives, capacity building workshops and innovation development credits will also be provided to MSMEs. This will allow incubators faster and greater access to financing, both from government and private sources.

Under the Philippine’s Innovation Fund PHP 1 billion (around $20 million) will be set aside to engage private enterprises to aid in the development of innovative solutions which are to benefit the poorest of poor and to set-up workshops focusing on skill development of its citizens.

In terms of international cooperation in STI development at the global level, the Technology Facilitation Mechanism established under the Addis Ababa Action Agenda and the Technology Bank are still at their nascent development stages, and their impacts on STI development in the region remain to be seen. At the sub-regional level, the Asia-Pacific Economic Cooperation (APEC) Policy Partnership on STI was formed in 2012 to support the development of science and technology cooperation as well as effective STI policy recommendations in APEC through collaboration between government, academia, private sector and other APEC fora.

The South Asian Association for Regional Cooperation (SAARC) also has a technical committee on science and technology that has undertaken activities such as seminars, workshops, meetings of experts, training programmes and joint research projects. In ASEAN, a series of science and technology plans of action have been developed since the ASEAN Committee on Science and Technology was established in 1978.

All in all, current intergovernmental STI and innovation cooperation in Asia and the Pacific is largely disjointed and ad hoc. The Information and Communications Technology & Science, Technology and Innovation Committee under the auspices of ESCAP provides an important solution.57 Yet, other specialized regional STI fora would provide additional avenues for South-South and triangular cooperation in STI development. In this respect, in 2018 ESCAP organized an Expert workshop on Strategic Financing of R&D in Frontier Technologies,58 as one of the first activities of the newly established Asia-Pacific Research and Training Network on science, technology and innovation (ARTNETonSTI Policy).59

The Way ForwardThis brief overview reveals that countries in Asia and the Pacific differ from each other in terms of resources for investing in STI and ICT infrastructure. While advanced countries are accelerating their progress in STI, including in frontier technology such as artificial intelligence, some developing countries, especially LDCs, are at risk of being left further behind. To support least developed countries and small economies overcome their constraints in developing STI, it is necessary to deepen international cooperation. For that purpose, regional intergovernmental meetings, forums and research and training policy networks on STI could provide useful platforms for knowledge exchanges, sharing experiences and identifying challenges and opportunities for developing countries to take advantage of technological advances.

57 The Second Session of the Committee on Information and Communications Technology & Science, Technology and Innovation was held in Bangkok on29-31August2018.Seehttps://www.unescap.org/intergovernmental-meetings/committee-information-and-communications-technology-science-technology-and-innovation-second.

58 https://artnet.unescap.org/sti/events/expert-workshop-strategic-financing-rd-frontier-technologies59 TheAsia-PacificResearchandTrainingNetworkonSTIPolicy(ARTNETonSTIPolicy)isaplatformtosharefindingsofacademicresearchandtheir

policy implications, reflect on current science, technology and innovation policy issues, and support research to inform these policies in the Asia-Pacificregion.Seehttps://artnet.unescap.org/sti


The Addis Ababa Action Agenda provides a comprehensive framework to evaluate the region’s current situation and progress in seven broad areas of financing for development: domestic public resources; domestic and international private business and finance; international development cooperation; international trade; debt and debt sustainability; systemic issue; and science, technology, innovation and capacity-building. The implementation of the Agenda is of critical importance in light of the additional financial requirements the region will need in order to achieve the SDGs, which ESCAP has recently estimated to be of the order of $1.5 trillion per year or an average of 5 per cent of GDP in Asia and the Pacific (ESCAP, 2019).

With regards to public domestic resource mobilisation, numerous countries have recently embarked in ambitious tax reforms that are succeeding in rationalising tax structures and rates, strengthening tax administration, and increasing tax revenues. An area that requires additional attention is how to raise enough public resources to finance urban infrastructure development and the expansion of public services in the context of rapid urbanisation accompanied by traffic congestion, air pollution and the proliferation of slums. To address these issues, it will be necessary to consider options such as delegating the responsibilities of expenditure and revenue mobilization to local governments or to coordinate reforms between the central and municipal governments to improve revenue mobilization and public expenditure efficiency.

Another area that requires attention related to public revenue mobilisation is the need to enhance collaboration across national borders to address problems of trade mis-invoicing, taxing the digital economy, and harmful tax practices including aggressive tax planning. To combat trade mis-invoicing, the ‘Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and the Pacific’ under the auspices of ESCAP can help as it promotes the digitalization of trade processes to enable the seamless electronic exchange and legal recognition of trade-related data and documents across borders.

On the role of the private sector in financing for development, countries can, and should, leverage partnerships with the private sector to finance investment, especially on infrastructure, by strengthening their legal and regulatory architectures as well as by providing incentives for the private sector to participate. To this end, ESCAP has recently established an infrastructure financing and PPP network in Asia and the Pacific to promote peer learning and the identification of good practices in these areas and prioritize infrastructure project that maximise positive impacts on sustainable development. This network also encourages governments to develop capital markets to close financing gaps in infrastructure development and adopt a set of sustainability criteria to evaluate and monitor foreign direct investments.

Moreover, enhancing private sector finance is critical to support micro, small and medium-sized enterprises (MSMEs). On this front, several countries in the region have recently introduced new legislation and policy reforms, including the establishment of a credit bureau in Myanmar, the creation of an online movable assets collateral registry in Tajikistan, and the facilitation of access by banks to information from the credit bureau through an API (application programming interface) platform in Thailand.

It is critical to note that while the estimated annual financial requirement needed to achieve the SDGs averages 5 per cent of GDP for the region as a whole, it averages as much as 16 per cent of GDP for the region’s least developed countries. As such, their national resource mobilization efforts need to be complemented by international development assistance and by stepping up international partnerships. Such assistance and partnerships would significantly aid in closing the LDC’s financing gaps at a faster pace. Realizing the need for increased regional cooperation and integration, ESCAP plays a pivotal role by bringing together national governments and the private sector to find ways to actively integrate LDCs and Small island states into the regional and world markets, to solve their development challenges, and to mobilise much needed financing for development.

Conclusion


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Annex

Recent ESCAP activities in various areas of financing for development

Cross-cutting Activities

• IntergovernmentalMeetings

o First session of the Committee on Macroeconomic Policy, Poverty Reduction and Financing for Development (6-8 Dec 2017); Bangkok, Thailand.

o 2nd Ministerial Conference on Regional Economic Cooperation and Integration in Asia and the Pacific (21-24 Nov 2017); Bangkok, Thailand.

• PolicyDialogues

o 4th High-Level Dialogue on Financing for Development in Asia and the Pacific (28-29 Apr 2017); Bangkok, Thailand.

o 1st High-Level Follow-up Dialogue on Financing for Development in Asia and the Pacific (30-31 Mar 2016); Incheon, Republic of Korea.

o Asia-Pacific High-Level consultation on Financing for Development (29-30 Apr 2015); Jakarta, Indonesia.

o Asia-Pacific Outreach Meeting on Sustainable Development Financing (10-11 Jun 2014); Jakarta, Indonesia.

• Publications

o Reports

» United Nations Economic and Social Commission for Asia and the Pacific (2019). Economic and Social Survey of Asia and the Pacific 2019: Ambitions beyond growth. Bangkok: United Nations.

» United Nations Economic and Social Commission for Asia and the Pacific (2018). Economic and Social Survey of Asia and the Pacific 2018: Mobilizing finance for sustained, inclusive and sustainable economic growth. Bangkok: United Nations.

» United Nations Economic and Social Commission for Asia and the Pacific (2018). Financing for Development in Asia and the Pacific. Highlights in the context of the Addis Ababa Action Agenda. Bangkok: United Nations.

» United Nations Economic and Social Commission for Asia and the Pacific (2018). The Role of Asia and The Pacific in Global Governance and Multilateralism. Bangkok: United Nations.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Financing the SDGs in the Pacific islands: Opportunities, Challenges and Ways Forward. Bangkok: United Nations publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2017) Enhancing Regional Economic Cooperation and Integration in Asia and the Pacific. Bangkok: United Nations Publication.


» United Nations Economic and Social Commission for Asia and the Pacific (2017). Handbook on Policies, Promotion and Facilitation of Foreign Direct Investment for Sustainable Development in Asia and the Pacific. Bangkok; United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2015). Financing for Transformation: From Agenda to Action on Sustainable Development in Asia and the Pacific. . Bangkok; United Nations Publication.

o Working papers

» Financing Sustainable Development – What can we learn from the Australian Experience of reform? (Jun 2015)

• CapacityBuilding

o Supporting Asia-Pacific LLDCs and Bhutan in Mobilizing Resources for the SDGs (11-14 Dec 2018); Thimphu, Bhutan

o Workshop on Supporting Least Developed Countries (LDC) in Asia-Pacific in meeting the challenges of resource mobilization for achieving the 2030 Agenda for Sustainable Development (6-7 Dec 2018); Phnom Penh, Cambodia

o Workshop on Resource Mobilization for Sustainable Development in Vanuatu (26-27 Nov 2018); Port Vila, Vanuatu

o Workshop on Supporting Cambodia in meeting the challenges of resource mobilization for achieving the 2030 Agenda for Sustainable Development (5-6 Nov 2018); Phnom Penh, Cambodia

o 8th Meeting of the Asia-Pacific Foreign Direct Investment (FDI) Network (25-26 Sep 2018); Bangkok, Thailand

o Training Workshop on Promoting and Facilitating Foreign Direct Investment in Uzbekistan (20-21 Dec 2017); Tashkent, Uzbekistan

o 7th Meeting of the Asia-Pacific Foreign Direct Investment (FDI) Network (2-3 Nov 2017); Bangkok, Thailand

o Regional Seminar on International Investment Agreements (IIAs) and Sustainable Development and Sixth Meeting of the Asia-Pacific Foreign Direct Investment (FDI) Network (1-2 Dec 2016); Bangkok, Thailand


A. Domestic Public Resources

• ExpertGroupMeetings

o Meeting of the Eminent Expert Group on Tax Policies and Public Expenditure Management for Sustainable Development (6-7 Dec 2016); Bangkok, Thailand

• Publications

o Reports

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Economic and Social Survey of Asia and the Pacific 2017: Governance and Fiscal Management. Bangkok: United Nations.

» Taxing for Shared Prosperity: Policy options for the Asia-Pacific Region (Dec 2017)

o Books

» United Nations Economic and Social Commission for Asia and the Pacific (2018). Tax Policy for Sustainable Development in Asia and the Pacific. Bangkok: United Nations.

o Working Papers

» Metropolitan City Finances in Asia and the Pacific Region: Issues, Problems and Reform Options (Dec 2017)

» Tax Policy and Public Expenditure Management in Asia and the Pacific (Dec 2017)

» Environmental Tax Reforms in Asia and the Pacific (Dec 2017)

» Tax Incentives and Tax Base Protection in Developing Countries (Dec 2017)

» Prospects for Progressive Tax Reforms in Asia and the Pacific (Dec 2017)

» Financing the Social Sector: Regional Challenges and Opportunities (Jun 2015)

o Policy Briefs:

» Reforming tax system in South and South-West Asia (Apr 2018)

» Managing fiscal volatility in the Pacific (Apr 2018)

» Expanding the tax base (Apr 2018)

» Improving tax administration (Apr 2018)

» Leveraging technology in fiscal management (Apr 2018)

» Making effective use of fiscal space for sustainable development (Apr 2018)


o Workshop on Public Resource Mobilization for municipal finance (8-9 Nov 2018); Bangkok, Thailand

o Workshop on Domestic Public Resource Mobilization for Sustainable Development (6-7 Dec 2017); Bangkok, Thailand

o Workshop on Medium-term Expenditure Planning for National Sustainable Development (6-10 Nov 2017); Apia, Samoa


B. Domestic and International Private Business and Finance

• PolicyDialogues

o 1st Meeting of the Public-Private Partnership and Infrastructure Financing Network of Asia and the Pacific (12-13 Sep 2018); Guiyang, China

o Regional Event on Financing Sustainable Infrastructure Development in Asia and the Pacific (6-7 Dec 2017); Bangkok, Thailand

o Policy Dialogue on Infrastructure Financing Strategies for Sustainable Development in South-East Asia (29-30 Aug 2017); Manila, Philippines

o Asia-Pacific Forum on Public-Private Partnerships for Transport Infrastructure Development (21-22 Jan 2015); Bangkok, Thailand


o Expert Group Meeting on Infrastructure Financing for Sustainable Development in Asia and the Pacific (7-8 Mar 2019); Bangkok, Thailand

o Workshop on small and medium enterprises’ access to finance and the role of development banks in Asia and the Pacific and Latin America (27-28 Sep 2017); Bangkok, Thailand

• Publications

o Reports

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Asia-Pacific Countries with Special Needs Development Report 2017: Investing in infrastructure for an inclusive and sustainable future. Bangkok: United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Handbook on Policies, Promotion and Facilitation of Foreign Direct Investment for Sustainable Development in Asia and the Pacific. Bangkok: United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Georgia National Study: Infrastructure Financing Strategies for Sustainable Development. Bangkok: United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Nepal National Study: Infrastructure Financing Strategies for Sustainable Development. Bangkok: United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). The Philippines- National Study: Infrastructure Financing Strategies for Sustainable Development. Bangkok: United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Samoa- National Study: Infrastructure Financing Strategies for Sustainable Development. Bangkok: United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Viet Nam- National Study: Infrastructure Financing Strategies for Sustainable Development. Bangkok: United Nations Publication.


» United Nations Economic and Social Commission for Asia and the Pacific (2016). Country Guidance: Public-Private Partnerships for Sustainable Development in Asia and the Pacific. Bangkok: United Nations Publication.

o Books

» Infrastructure Financing for Sustainable Development in Asia and the Pacific (Forthcoming, 2019)

o Working Papers

» Tapping Capital Markets and Institutional Investors for Infrastructure Development (May 2018)

» Estimating infrastructure financing needs in Asia-Pacific least developed countries, landlocked developing countries and small island developing countries (May 2017)

» Public-private partnership for cross-border infrastructure development (Apr 2017)

» Obstacles to productivity in Asia and Pacific region: finance reigns (Aug 2016)

» Infrastructure Financing, Public-Private Partnerships, and Development in the Asia-Pacific Region (Jul 2015)

» Capital Market Development and Emergence of Institutional Investors in the Asia-Pacific Region (Jul 2015)

» Inclusive Finance in the Asia-Pacific Region: Trends and Approaches (Jun 2015)

o Policy Briefs

» FinTech in the Pacific Island Countries: Challenges and Opportunities (18 March 2019)

» Enhancing the policy environment for public-private-partnerships (30 April 2018)

» Access of micro-, small and medium- sized enterprises to finance in North and Central Asia (30 April 2018)


o Workshop and stakeholders’ consultation on enhancing MSMEs financing in Cambodia with comparative perspectives from Nepal and Republic of Korea (31 Jan – 1 Feb 2019); Phnom Penh, Cambodia

o Stakeholders’ consultation workshop for the study on access to finance of MSME in Nepal (30 Nov 2018); Kathmandu, Nepal

o National Workshop on Promoting and Facilitating Foreign Direct Investment for Sustainable Development in the Islamic Republic of Iran (9-11 Oct 2018), Tehran, Islamic Republic of Iran

o National Workshop on Infrastructure Financing Strategies in Viet Nam (3 Oct 2017); Hanoi, Viet Nam

o Workshop on small and medium enterprises’ access to finance and the role of development banks in Asia and the Pacific and Latin America (27-28 Sep 2017); Bangkok, Thailand

o Workshop on Infrastructure Financing Strategies in the Philippines (29 Aug 2017); Manila, Philippines


o Workshop on Infrastructure Financing Strategies for Sustainable Development in Georgia (6 Jun 2017); Tbilisi, Georgia

o Workshop on Infrastructure Financing Strategies for Sustainable Development in Samoa (1-2 Feb 2017); Apia, Samoa

o National Workshop on Infrastructure Financing Strategies for Sustainable Development in Nepal (24 Jan 2017); Kathmandu, Nepal

C. International Development cooperation

• PolicyDialogues

o Regional Consultation on South-South Cooperation in Asia and the Pacific (27-29 Jun 2018); Bangkok, Thailand

• Publications

o Working Papers

» LDC Graduation: Challenges and Opportunities for Vanuatu (Jan 2019)

» Preparing to graduate: Issues, challenges and strategies for Kiribati’s LDC graduation (Jan 2019)

» Climate finance in the Asia-Pacific: Trends and Innovative Approaches (Jun 2015)

• Capacitybuilding

o Pacific Sub-regional Workshop on Preparing for a Smooth Graduation from the Least Developed Country Category (22-23 Nov 2018); Port Vila, Vanuatu

o Regional Capacity Building Workshop: Formulating National Policies and Strategies in Preparation for Graduation from the LDC Category, Bhutan (14-16 Nov 2017)

o Regional workshop on strengthening development of the Least Developed Countries in Asia and the Pacific to support implementation of the 2030 Agenda for Sustainable Development; Phnom Penh, Cambodia (17-18 Oct 2017)


D. International Trade as an engine for Development

• Intergovernmentalmeetings

o Fifth session of the Committee on Trade and Investment (13-15 Mar 2019); Bangkok, Thailand

o Fourth session of the Committee on Trade and Investment (31 Oct-2 Nov 2017); Bangkok, Thailand

• PolicyDialogues

o High-level Policy Dialogue on Safeguarding the Multilateral Trading System for Sustainable Development (2 Nov 2017); Bangkok, Thailand

o The Asia-Pacific Trade Facilitation Forum -APTFF- (5-8 Sep 2017); Yogyakarta, Indonesia


o Fifth Meeting of the Interim Intergovernmental Steering Group on Cross-Border Paperless Trade Facilitation (12-13 Mar 2019); Bangkok, Thailand

o National Consultative Workshop on Cross-border Paperless Trade Facilitation (26 Feb 2019); Yogyakarta, Indonesia

o 2nd Meeting of UNNExT Task Force on Cross-Border Electronic Data Exchange and Subregional Capacity Building Workshop on Data Harmonization for Trade Facilitation (4-7 Dec 2018); Kemerovo, Russian Federation

o COMCEC Trade Working Group Meeting on Trade Facilitation and Customs Risk Management (26-29 Nov 2018); Istanbul, Turkey

o Meeting of the Extended UNNExT Advisory Group on Cross-border Paperless Trade Facilitation (30 Oct – 1 Nov 2018); Bangkok, Thailand

o Fourth Meeting of the Interim Intergovernmental Steering Group on Cross-Border Paperless Trade Facilitation (22-23 Mar 2018); Bangkok, Thailand

o Third Meeting of the Interim Intergovernmental Steering Group on Cross-Border Paperless Trade Facilitation (23-24 Mar 2017); Bangkok, Thailand

o Asia-Pacific Trade Facilitation Forum 2017 and side events, (5-8 Sep 2017); Yogyakarta, Indonesia

• Publications

o Reports

» United Nations Economic and Social Commission for Asia and the Pacific (2018). Asia-Pacific Trade and Investment Report 2018: Recent Trends and Developments. Bangkok; United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2018). The Role of Asia and the Pacific in Global Governance and Multilateralism. Bangkok; United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2018). Trade Facilitation and Paperless Trade Implementation in Asia-Pacific Countries with Special Needs. Bangkok; United Nations Publication.


» United Nations Economic and Social Commission for Asia and the Pacific (2017). Asia-Pacific Trade and Investment Report 2017: Channeling Trade and investment into Sustainable Development. Bangkok; United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Trade Facilitation and Paperless Trade Implementation- Global Report 2017. Bangkok; United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2016). Asia-Pacific Trade and Investment Report 2016: Recent Trends and Developments. Bangkok; United Nations Publication.

» United Nations Economic and Social Commission for Asia and the Pacific (2015). Asia-Pacific Trade and Investment Report 2015: Supporting Participation in Value Chains. Bangkok; United Nations Publication.

o Books

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Services and Global Value chains: The Asia-Pacific Reality, Studies in Trade, Investment and Innovation 89. Bangkok: United Nations.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Socially Responsible Business: A Model for A Sustainable Future, Studies in Trade, Investment and Innovation No.88. Bangkok: United Nations.

» United Nations Economic and Social Commission for Asia and the Pacific (2017). Digital Trade Facilitation in Asia and the Pacific, Studies in Trade, Investment and Innovation 87. Bangkok: United Nations.

o Working Papers

» Where and how to dodge taxes and shift money abroad using trade misinvoicing: A beginner’s guide (Apr 2018).

» Trade and trade facilitation along the Belt and Road Initiative corridors (Nov 2017).

» Strengthening the legal framework for attracting FDI: The case of Lao People’s Democratic Republic (Jul 2017).

» Business Process Analysis of Export of Cardamom from Bhutan to Bangladesh (Jun 2017).

» Business Process Analysis of Export of Ferro Silicon from Bhutan to the Third Countries (Jun 2017).

» Business Process Analysis of Export of Plastic Kitchenware and Tableware from Bangladesh to Bhutan (Jun 2017).

» Business Process Analysis of Import of Plastic Kitchen and Table ware of plastics (melamine products) from Bangladesh to Bhutan (Jun 2017).

» Business Process Analysis of Import of Lentil from Nepal to Bangladesh (Jun 2017).

» Business Process Analysis of Import of Light Motor Vehicles from the third Countries to Bhutan via Kolkata Port (Jun 2017).

» Time release Study of Burimari Land Border Crossing Station, Bangladesh (Jun 2017).

» Time release study in Phuentsholing (Jun 2017).


» Performance Measurement and Monitoring of the Selected Bangladesh’s Trade Corridors (Jun 2017).

» Performance and Monitoring of the Selected Bhutan’s Trade Corridors (Jun 2017).

» Renewable Energy Sector in Emerging Asia: Development and Policies (May 2017).

o Policy Briefs

» Trade war: Two elephants in a porcelain shop (Mar 2018).

» Is trade policy being effectively used to curb drinking and smoking? Evidence from ASEAN (Jan 2018).

» Do Data Show Divergence? Revisiting Global income Inequality Trends (Oct 2017).

» Implications of Brexit to the Asia-Pacific region: with a focus on least developed countries (Mar 2017).


o Workshop on Non-Tariff Measures and International Standards for Sustainable Development (13-15 Mar 2019); Bangkok, Thailand

o Regional Workshop on Evidence-Based Trade Policy Making for Sustainable Development (27-30 Nov 2018); Bangkok, Thailand

o Regional workshop on using Evidence Based Trade Policy for Achieving the Sustainable Development Goals in LDCs and LLDCs (3-5 Sep 2018); Thimphu, Bhutan

o Regional Workshop on Trade Facilitation for Sustainable Development (7-10 Aug 2018); Bangkok, Thailand

o Capacity Building Workshop on “Non-Tariff Measures: economic assessment and policy options for development” (3-6 Jul 2018); Bangkok, Thailand

o Capacity Building Workshop on Cross-border Paperless Trade Facilitation: Implications of Emerging Technologies (21 & 23 Mar 2018); Bangkok, Thailand

o Strengthening Development of Least Developed Countries in Asia and the Pacific to Support Implementation of the 2030 Agenda for Sustainable Development (17-18 Oct 2017); Phnom Penh, Cambodia

o Sri Lanka: Capacity Building on Trade Policy Analysis (20-22 Sep 2017); Colombo, Sri Lanka.

o Regional Workshop on “Trade and Environment for Asia and Pacific Economies (18-19 Sep 2017); Colombo, Sri Lanka.

o National workshop on Negotiating Preferential Trade Agreements (29-31 Aug 2017); Phnom Penh, Cambodia.

o Regional Workshop on Least developed countries and leveraging trade as a means of implementation for the 2030 Agenda (2-4 Aug 2017); Thimphu, Bhutan.

o Training of Trainers: Enhancing Capacity on Trade Policies and Negotiations (3-5 May 2017); Vientiane, Lao People's Democratic Republic.


E. Debt and Debt Sustainability

• Publications

o Policy Briefs

» Developing local currency bond markets in South-East Asia (April 2018)

» Making effective use of fiscal space for sustainable development (April 2018)

» Managing fiscal volatility in the Pacific (April 2018)

» Prudent sovereign borrowing from financial markets (April 2018)

» How does governance affect fiscal management? Evidence from Asian-Pacific countries (May 2017)

» Fiscal stance and fiscal sustainability in Asia and the Pacific (May 2017)

F. Addressing Systemic Issues

• Publications

o Working Papers

» Regulation of cryptocurrencies: evidence from Asia and the Pacific (Aug 2018)

o Policy Briefs

» The nexus between peace and sustainable development in Asia-Pacific countries with special needs (May 2018)

» Securing financial stability through macroprudential measures (April 2018)

» Governance and development outcomes: chicken and egg (May 2017)

» Narrowing development gaps through better governance in South-East Asia (May 2017)


G. Science, Technology, Innovation and Capacity-building

• IntergovernmentalMeetings

o Second session of the Committee on Information and Communications Technology & Science, Technology and Innovation (29-31 Aug 2018); Bangkok, Thailand

• PolicyDialogues

o ESCAP Forum on Policies for Inclusive Innovation and Social Entrepreneurship (27 Sep 2018); South Tangerang City, Indonesia

o Regional Consultation on Inclusive Technology and Innovation Policies (28-31 Aug 2018); Bangkok, Thailand

o Asia-Pacific Forum on Science and Technology Parks: Sharing development experience and building a more prosperous Asia and the Pacific (27-29 Nov 2017); Haefei City, China


o Expert Group Meeting on Science and Technology Parks (18 Dec 2018); Bangkok, Thailand

o Policy Research workshop: Supporting policy makers in the Asia-Pacific region to formulate and implement effective policies and strategies to foster social entrepreneurship and impact investment (10 Oct 2018); New Delhi, India Regional Consultation on e-Commerce for Sustainable Development (30 Oct 2017); Bangkok, Thailand

• Publications

o Reports

» United Nations Economic and Social Commission for Asia and the Pacific (May 2018). Frontier technologies for sustainable development in Asia and the Pacific. Bangkok: United Nations Publication

» United Nations Economic and Social Commission for Asia and the Pacific (Nov 2017). Artificial Intelligence and broadband Divide: State of ICT Connectivity in Asia and the Pacific 2017. Bangkok: United Nations Publication

» United Nations Economic and Social Commission for Asia and the Pacific (Nov 2017). Digital and Virtual Currencies for Sustainable Development. Bangkok: United Nations Publication

» United Nations Economic and Social Commission for Asia and the Pacific (Oct 2017). Innovative Financing for Development in Asia and the Pacific. Bangkok: United Nations Publication

o Working Papers

» Science, technology and innovation in international investment agreements in the Asia-Pacific region (Oct 2017).


o Expert workshop on Strategic Financing of R&D in Frontier Technologies (12 Dec 2018); Bangkok, Thailand

o Sub-regional Workshop on implementation of the Asia-Pacific Information Superhighway for achieving the Sustainable Development goals in Pacific Island Countries (19-23 Nov 2018); Nadi, Fiji

o Asia Pacific Impact Investment workshop (22-23 Feb 2018); Seoul, Republic of Korea


For futher information on this publication, please address your enquiries to:

Chief

Conference and Documentation Services Section

Division of Adminstration

Economic and Social Commission for Asia and the Pacific (ESCAP)

United Nations Building, Rajadamnern Nok Avenue

Bangkok 10200, Thailand

Tel: 66 2 288-2109

Fax: 66 2 288-3018

Email: [email protected]

FINANCING FOR DEVELOPMENT IN ASIA AND THE PACIFICHighlights in the Context of the Addis Ababa Action Agenda2019 Edition